Contracts in informed-principal problems with moral hazard

Publication Type:
Journal Article
Economic Theory Bulletin, 2016
Issue Date:
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In many cases, an employer has private information about the potential productivity of a worker, who in turn has private information about the effort she exerts on the job. Much of the analysis of this environment in the literature restricts the employer to offer contracts that depend only on observable outcomes (e.g., profit). This paper studies the advantages to the employer of offering the worker a set of potential contracts from which the employer will choose after the worker has accepted the offer, so called menu-contracts. Specifically, in a two-state principal-agent problem with moral hazard, I show when the principal can obtain strictly higher expected payoffs than the restricted contracts of the literature by offering a menu-contract.
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