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Limit of the Principal’s Information
College of Economics, Ritsumeikan University, Shiga, Japan
- 1 College of Economics, Ritsumeikan University, Shiga, Japan
Theoretical Economics Letters·Volume 07 (2017)·Pages 210–217·Published 3 February 2017·DOI10.4236/tel.2017.72018
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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.
KeywordsAdverse SelectionSubjective InformationCorrelation
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