Abstract
I consider a moral hazard problem with risk neutral parties, limited liability, and an informed principal. The contractible outcome is correlated to both the principal’s private information and the agent’s hidden action. In contrast to a model without a privately informed principal or without limited liability, I show that the first-best payoff cannot be implemented by any equilibrium mechanism.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Beaudry, Paul: Why an informed principal may leave rents to an agent. Int. Econ. Rev. 35(4), 821–832 (1994)
Grossman, Sanford J., Hart, Oliver D.: An analysis of the principal-agent problem. Econometrica: Journal of the Econometric Society, 7–45 (1983)
Inderst, Roman: Incentive schemes as a signaling device. J. Econ. Behavi. Org. 44(4), 455–465 (2001)
Karle, Heiko, Schumacher, Heiner, Staat, Christian: Signaling quality with increased incentives. Euro. Econ. Rev. 85, 8–21 (2016)
Maskin, Eric, Tirole, Jean: The principal-agent relationship with an informed principal: the case of private values. Econometrica 58(2), 379–409 (1990)
Maskin, Eric, Tirole, Jean: The principal-agent relationship with an informed principal, ii: common values. Econometrica 60(1), 1–42 (1992)
Myerson, Roger B.: Mechanism design by an informed principal. Econometrica 51(6), 1767–1797 (1983)
Mylovanov, Tymofiy, Tröger, Thomas: Informed-principal problems in environments with generalized private values. Theoretical Econ. 7(3), 465–488 (2012)
Mylovanov, Tymofiy, Tröger, Thomas: Mechanism design by an informed principal: private values with transferable utility. Rev. Econ. Stud. 81(4), 1668 (2014)
Wagner, Christoph, Mylovanov, Tymofiy, Tröger, Thomas: Informed-principal problem with moral hazard, risk neutrality, and no limited liability. J. Econ. Theory 159, 280–289 (2015)
Acknowledgements
I am grateful to Eddie Dekel, Asher Wolinsky, and Bruno Strulovici for their invaluable comments.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Mekonnen, T. Informed principal, moral hazard, and limited liability. Econ Theory Bull 9, 119–142 (2021). https://doi.org/10.1007/s40505-021-00201-3
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40505-021-00201-3