Contracts for Information Acquisition

Abstract:

I study contracting for information acquisition under moral hazard. When the cost of information is expected reduction in Shannon entropy all Pareto optimal contracts pay a fraction of output together with a state fixed effect and a decision fixed effect. The fraction of output is increasing in the set of experiments available to the agent. The state fixed effect indexes contract payments to state-wide differences in output. And the decision fixed effect punishes the agent for taking decisions in which liability limits are likely to bind. I apply my findings to optimal financial contracting. My results extend to incomplete and dynamic contracting environments. 

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Last updated on 03/22/2017