Contracting on Information about Value
49 Pages Posted: 25 Aug 2021 Last revised: 9 May 2024
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: 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
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