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Informed principal, moral hazard, and limited liability

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Abstract

I consider a moral hazard problem with risk neutral parties, limited liability, and an informed principal. The contractible outcome is correlated to both the principal’s private information and the agent’s hidden action. In contrast to a model without a privately informed principal or without limited liability, I show that the first-best payoff cannot be implemented by any equilibrium mechanism.

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Acknowledgements

I am grateful to Eddie Dekel, Asher Wolinsky, and Bruno Strulovici for their invaluable comments.

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  1. Department of Economics, Brown University, Providence, RI, USA

    Teddy Mekonnen

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  1. Teddy Mekonnen
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Correspondence to Teddy Mekonnen.

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Mekonnen, T. Informed principal, moral hazard, and limited liability. Econ Theory Bull 9, 119–142 (2021). https://doi.org/10.1007/s40505-021-00201-3

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  • DOI: https://doi.org/10.1007/s40505-021-00201-3

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