Delegated Expertise - When are Good Projects Bad News?
8 Pages Posted: 20 Jan 2003
Date Written: October 29, 2002
We analyze a model of delegated expertise with limited liability where both the agent's effort and his findings are unobservable. We show that the latter assumption reduces the agent's effort and the principal's profit in the unique subgame perfect equilibrium. Most interestingly, the principal's profit may decrease in the percentage of good projects if and only if the agent's findings are unobservable. Hence, good projects may be bad news for the principal.
Keywords: delegated expertise, information revelation, hidden action, limited liability
JEL Classification: D82, G21
Suggested Citation: Suggested Citation