Abstract

We study a moral hazard model in which the output is stochastically determined by both the agent’s hidden effort and an uncertain state of the world.We investigate how the contractibility of the ex-post realization of the state affects the principal’s incentive to provide information. While detailed information allows the principal to better tailor the effort levels to the revealed states, coarser information enables the principal to base payments on the ex-post realization of states,
thereby designing incentive schemes more effectively. Our main result establishes that when the state is contractible, full information is never optimal; however, when the state is not contractible, under certain conditions, full information is optimal.

joint work with Gregorio Curello and Yimeng Zhang.

Paper available here