Contracting on Information about Value

49 Pages Posted: 25 Aug 2021 Last revised: 9 May 2024

See all articles by Jonathan Bonham

Jonathan Bonham

University of Illinois at Chicago

Amoray Riggs-Cragun

University of Chicago Booth School of Business

Date Written: October 07, 2024

Abstract

We revisit the optimal use of information under moral hazard by assuming that the agent chooses distributions nonparametrically at a cost that is increasing in the number of variables he controls. Under this assumption, the optimal contract behaves as if the principal were making inferences about outcomes she values. Consequently, Holmström's (1979) informativeness principle does not apply. A signal is useful for contracting if and only if it is informative about value, not the agent's action. This result suggests that executive compensation contracts should be based on measures of shareholder value, consistent with how CEO incentives are driven primarily by stock price. 

Suggested Citation

Bonham, Jonathan and Riggs-Cragun, Amoray, Contracting on Information about Value (October 07, 2024). Chicago Booth Research Paper No. 22-03, Available at SSRN: https://ssrn.com/abstract=3892838 or http://dx.doi.org/10.2139/ssrn.3892838

Jonathan Bonham

University of Illinois at Chicago ( email )

601 S. Morgan
Chicago, IL 60607

Amoray Riggs-Cragun (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

HOME PAGE: http://www.riggscragun.com/

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