“…Lewis and Sappington (), Crémer et al. (), Kessler (), Krähmer and Strausz (), Zermeño (), Terstiege (), and Hoppe and Schmitz () fall into this category. These studies, however, either do not consider deterrence of information acquisition, or they assume that a deterministic output is a perfect measure of the agent's productive effort when information acquisition is deterred.…”
Section: Introductionmentioning
confidence: 99%
“…Please refer to Lewis and Sappington (), Crémer et al. (), and Terstiege () in the literature review for more details.…”
I study the optimal incentive provision in a principal-agent relationship with costly information acquisition by the agent. I emphasize that adverse selection or moral hazard is the principal's endogenous choice by inducing or deterring information acquisition. The principal designs the contract not only to address an existing incentive problem but also to implement its presence. Implementation of adverse selection relies on a steeper information rent to the agent than the standard menu, such that the agent is motivated to distinguish the efficient state of nature from the inefficient. Moral hazard is implemented by replacing the benchmark debt contract with a debt-with-equity-share contract, such that the agent does not attempt to acquire information to either avoid debt or to extract rent.
“…Lewis and Sappington (), Crémer et al. (), Kessler (), Krähmer and Strausz (), Zermeño (), Terstiege (), and Hoppe and Schmitz () fall into this category. These studies, however, either do not consider deterrence of information acquisition, or they assume that a deterministic output is a perfect measure of the agent's productive effort when information acquisition is deterred.…”
Section: Introductionmentioning
confidence: 99%
“…Please refer to Lewis and Sappington (), Crémer et al. (), and Terstiege () in the literature review for more details.…”
I study the optimal incentive provision in a principal-agent relationship with costly information acquisition by the agent. I emphasize that adverse selection or moral hazard is the principal's endogenous choice by inducing or deterring information acquisition. The principal designs the contract not only to address an existing incentive problem but also to implement its presence. Implementation of adverse selection relies on a steeper information rent to the agent than the standard menu, such that the agent is motivated to distinguish the efficient state of nature from the inefficient. Moral hazard is implemented by replacing the benchmark debt contract with a debt-with-equity-share contract, such that the agent does not attempt to acquire information to either avoid debt or to extract rent.
“… These factors include the timing of information gathering (Crémer & Khalil, 1994; Crémer et al, 1998b; Kessler, 1998; Terstiege, 2012), whether information gathering is productive or strategic (Crémer & Khalil, 1992; Crémer et al, 1998b; Hoppe & Schmitz, 2010; Schmitz, 2008; Terstiege, 2016), the number of agents (Compte & Jehiel, 2008; Crémer& Khalil, 1992), as well as whether to delegate, integrate, or separate planning and implementation (Dai et al, 2006; Khalil et al, 2006; Hoppe & Schmitz, 2013; Lewis & Sappington, 1997; Shin & Yun, 2008). …”
A principal hires an agent to both gather information about a project's costs and implement it. The agent's information‐gathering effort and what he learns are his private information. I allow the agent to be overconfident in the sense that he underestimates his expected cost of implementation and study the effects this overconfidence has on the efficiency of information acquisition and implementation. Overconfidence makes the agent more willing to accept a given contract but may dampen his incentive to gather information. As a result, information may not be gathered in equilibrium due solely to the agent's overconfidence, which causes inefficiencies in the project's implementation. When the agent's information‐gathering cost is low enough, the principal's payoff is nonmonotonic in the degree of overconfidence, increasing for both low and high levels of overconfidence, but decreasing for intermediate levels.
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