Moral Hazard with Discrete Soft Information

Guillaume Roger
2011 Social Science Research Network  
I study a simple model of moral hazard with soft information. The risk-averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection. Some measure of truthful revelation is necessary to implement any effort, for which an audit is required. And for effort to be induced the agent must be offered a rent. There exists a truth-telling equilibrium, and one with partial pooling, with effort in either case. To accommodate ex
more » ... . To accommodate ex post information revelation, the principal must distort the transfer schedule, as compared to the standard moral hazard problem. Then effort is implemented for a smaller set of parameters than in the standard problem. * Financial support from the Australian School of Business at UNSW is gratefully acknowledged.
doi:10.2139/ssrn.1999803 fatcat:2q2snz5wg5esvihsb7uvqavm7y