Nahum Melumad

Value of Communication in Agencies

Coauthor(s): Stefan Reichelstein.

Abstract:
Focusing on an agency model in which the agent receives private information prior to contracting, we analyze whether the principal benefits from offering the agent a menu of contracts. We show that, under certain conditions, the constraints imposed by the self-selection requirement are so restrictive that a menu of contracts has no value, i.e., the principal might as well offer a single contract based only on some jointly observed outcome. Conversely, we identify cases where a menu of contracts is valuable because it allows the principal to implement a more efficient incentive structure.

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