On the precision of information

• Type: Article in International Scientific Journal
• Date: 2021-05-17

Authors

Samuel Alves Pereira (Author) FEP

Journal

Title: JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY

ISSN: 1058-6407

Publisher: John Wiley & Sons

Indexing

ISI Web of Knowledge - 1 Citation

Scopus - 0 Citations

Other information

Authenticus ID: P-00T-Y54

DOI: 10.1111/jems.12429

Abstract (EN): This paper explores a model in which the agent's effort affects (solely) the precision (variance) of a performance measure (signal) of the outcome. Both the principal and the agent are risk averse. The contract the principal offers is composed of a fixed payment plus variable compensation, depending on the outcome and based on a (linear) risk-sharing rule between the principal and the agent. Moral hazard alone leads to an upward distortion (above the first-best) of the risk-sharing rule. This serves to induce more effort to increase information precision. Adverse selection alone introduces two new features. First, to reduce informational rents, the risk-sharing rule is distorted downward below the first-best. Second, to induce truthful information revelation, the risk-sharing rule becomes increasing with the expected outcome-the agent's private information. When moral hazard and adverse selection are considered together, and there is enough uncertainty related to adverse selection, the risk-sharing rule is above the first-best for more efficient types, but below the first-best for less efficient types. Further, the precision of the signal increases with the expected outcome.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 16