10 - Hidden Information

Question 1

What are principal-agent-relationships?

Answer 1

A principal delegates a task to an agent due to lack of time, lack of expertise or increased specialization.

Question 2

What does private information have to do with principal-agent-relationships?

Answer 2

Delegation involves informational advantages
 Cost of the task
 Benefits of the task
 Right technology for the task
 Right task itself

Question 3

How can contracts be used in principal-agent-relationships?

Answer 3

Principal and agent may write a contract specifying a transfer t and a quantity q.
Variables q and t are observable and verifiable by outsiders.

Question 4

What is the timing of interactions between principal and agent contracts?

Answer 4

t=0: Agent discovers his type θ.
t=1: Principal offers a contract.
t=2: Agent accepts or refuses contract
t=3: Contract is executed.

Question 5

What are the principal and agent’s utilities in their contracting?

Answer 5

Principal: V(q,t) = S(q) - t

Agent: U(q,t) = t - θq

Question 6

What are the conditions for an equilibrium in a full information principal-agent-contract?

Answer 6

1) principal maximizes V(q, t)

2) principal must include participation constraint

Question 7

What are the conditions for an equilibrium in a hidden information principal-agent-contract?

Answer 7

1) principal maximizes V(q, t)

2) principal must include participation AND incentive constraints