Value of Communication in Agencies
Coauthor(s): Stefan Reichelstein.
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.
Source: Journal of Economic Theory
Melumad, Nahum, and Stefan Reichelstein. "Value of Communication in Agencies." Journal of Economic Theory 47, no. 2 (April 1989): 334-368.