Optimal Contract Under Moral Hazard with Soft Information

Guillaume Roger
2012 Social Science Research Network  
I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. This affects the shape and properties of the optimal contract, which fails to elicit truthful revelation in all states. In this set up audit
more » ... and transfer become strategic complements; this is rooted in the non-separability of the problem.
doi:10.2139/ssrn.1999802 fatcat:u7crevvgpzhm3btzlgevy6lbla