Krishna & Morgan on Contracting for Information
Vijay Krishna and John Morgan (Pennsylvania State University, University Park – Department of Economics and University of California, Berkeley – Economic Analysis & Policy Group) have posted Contracting for Information under Imperfect Commitment on SSRN. Here is the abstract:
- Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal’s commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is “bang-bang” – in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several “informal” institutional arrangements.