Information Asymmetry and the Value of Communication

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  • 情報非対称と情報伝達の価値

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Abstract

<p>In the principal-agent setting, it is often the case that the agent receives private information prior to contracting. Because of this information asymmetry, the principal suffers from substantial cost due to the adverse selection (and the moral hazard). Thus, we need some informational devices for the purpose of performance evaluation. There is no doubt that one of the most useful devices is communication. It plays three rolls in the agency relationship potentially: (a) improves incentive structure, (b) enables the principal to implement a given incentive structure at lower cost and (c) leads to improved risk-sharing. Focusing on the communication in the agency model, we measure its economic value in the numerical example and identify the cases where it is valuable or not.</p><p>Our analysis proceeds as follows. In section 2, the basic model is described and the optimization program with and without communication (PROGRAM 1 and 2, respectively) is proposed. This construction is explored in detail in section 3. In section 4, we examine the general cases in detail. Concluding remarks are contained in section 5.</p>

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