Krishna Morgan (2008) - Contracting For Information Under Imperfect Commitment

Reference(s)

Krishna, Vijay and John Morgan (2008), "Contracting for information under imperfect commitment", RAND Journal of Economics, Winter, Vol. 39, No. 4, pp. 905-925. link pdf

Abstract

We study optimal contracting under imperfect commitment in a model with an uninformed principal and an informed agent. The principal can commit to pay the agent for his advice but retains decision-making authority. Under an optimal contract, the principal should (a) never induce the agent to fully reveal what he knows? even though this is feasible? and (b) never pay the agent for imprecise information. We compare optimal contracts under imperfect commitment to those under full commitment as well as to delegation schemes. We 2nd that gains from contracting are greatest when the divergence in the preferences of the principal and the agent is moderate.

Results

Contracts with perfect commitment always achieve highest payoffs to principle. They show that under imperfect commitment, where the principle can not commit to a project, but can commit to a transfer rule, the optimal partial commitment contract has perfect separation in [math]\theta=[0,a_{0}][/math] and pooling for projects greater than that. We also show that an indirect mechanism:

[math]t(y)={/frac{t_{0}-2by if y\lt =a_{0}}{0 if y\gt =a_{0}}[/math]

However, if we consider like Williamson (1976) that costs of contracting can be substantial, there may be a range of biases by the agent where either imperfect commitment or delegation or even no contract what so ever which puts us completely in a Crawford and Sobel cheap talk model. We also explore an optimal delegation scheme where agent chooses any project from [0, 1-b] which leads to expected payoffs greater than imperfect commitment up to bias of amount b=.5