TITLE:
Limit of the Principal’s Information
AUTHORS:
Kazumi Hori
KEYWORDS:
Adverse Selection, Subjective Information, Correlation
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.2,
February
28,
2017
ABSTRACT: This note characterizes the optimal contract when a
principal has unverifiable subjective information that is correlated with an
agent’s private information. We find that the principal’s subjective
information cannot alleviate the information asymmetry and, moreover, the
second best contract is independent from it if the correlation is low.