Optimal Contract Under Moral Hazard with Soft Information

Abstract

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. The optimal transfer is option-like, the contract leaves the agent with some ex ante rent and fails to elicit truthful revelation in all states. Audit and transfer co-vary positively, which likely is a forgotten component of many real-life contracts.

Moral Hazard with Discrete Soft Information

“…In a separate paper (Roger, 2013) I show that truthful revelation is never possible for at least a subset of the type space when that space is continuous. The reason is that a continuous space allows for arbitrarily small misreporting.…”

“…M (Á)-implementable mechanisms exist and need not elicit truth-telling. I discuss this some more in Section V. This paper is connected to two articles that study a similar problem (Roger, 2012;Roger, 2013). It contains the essential results and most of the economics while remaining free of the burdensome technical apparatus necessary to a general analysis.…”

Contracting for Research: Moral Hazard and the Incentive to Overstate Significance

“…Other papers that touch upon similar topics include Levitt et al (1997), Roger (2013), and Che et al (2017). Levitt et al (1997) study the role of eliciting early warning about unpromising projects from employees within organizations.…”

A Revelation Mechanism for Soft Information Under Moral Hazard

“…This paper relies on the first order approach (see Jewitt, 1988). This paper has a companion (Roger 2013), in which I use the mechanism constructed here to carefully study the optimal contract. There, the focus is on the properties of the optimal contract, and in particular its comparative statics.…”

“…Introducing soft information alters the agent's incentives, and the principal's response, in several ways. A comprehensive analysis of these incentives and of the contract's properties is contained in a companion paper(Roger 2013). It is not repeated here but the reader is presented with some commentary.…”