Incentive contracting with asymmetric and imperfect precontractual knowledge.

*(English)*Zbl 0542.90021Summary: The Pareto optimal contract between principal and risk-neutral agent is analyzed for the case in which the agent’s information is initially imperfect but better than that of the principal. In contrast to the case where precontractual information is symmetric, the final contract between principal and agent will not always guarantee an efficient outcome. However, in contrast to the case where the agent’s information is initially perfect, the agent may be unable to command rents from his superior information, an the outcome will always be efficient. The conditions under which efficient or inefficient outcomes are guaranteed differ qualitatively according to whether the random state of nature follows a continuous or a discrete distribution.

##### Keywords:

incentive contracting; asymmetric and imperfect precontractual knowledge; Pareto optimal contract; principal; risk-neutral agent; efficient outcome
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