Informed Principal, Moral Hazard, and Limited Liability

Teddy Mekonnen
2017 Social Science Research Network  
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. Furthermore, limited liability precludes the existence of equilibrium refinements such as (Strongly)
more » ... such as (Strongly) Neologism proofness. * I am grateful to Eddie Dekel, Asher Wolinsky, and Bruno Strulovici for their invaluable comments.
doi:10.2139/ssrn.3083159 fatcat:pkahma43jbepjkpbnl5hi4lhzm