Essays on Contract Theory
Abstract
This dissertation is primarily on the contractual design to account for various source of information asymmetry in a principal-agent(s) relationship. In the first chapter, I study the optimal provision of team incentives with the feasibility for the agents to coordinate private actions through repeated interaction with imperfect public monitoring. As the agents' imperfect monitoring of private actions is inferred from the stochastically correlated measurements, correlation of measurement noise, besides its risk sharing role in the conventional multiple-agent moral hazard problem, is crucial to the accuracy of each agent's inference on the other's private action. The principal's choice of performance pay to provide incentive via inducing competition or coordination among the agents thus exhibits the tradeoff between risk sharing and mutual inference between the agents. I characterize the optimal form of performance pay with respect to the correlation of measurement noise and find that it is not monotonic as suggested by the literature. In the second chapter, I study the optimal incentive provision in a principal-agent relationship with costly information acquisition by the agent. When it is feasible for the principal to induce or to deter perfect information acquisition, adverse selection or moral hazard arises in response to the principal's decision, as if she is able to design a contract not only to cope with an existing incentive problem, but also to implement the existence of an incentive problem. The optimal contract to implement adverse selection by inducing information acquisition, comparing to the second best menu, exhibits a larger rent difference between an agent in an efficient state and whom in an inefficient state. The optimal contract to implement moral hazard by deterring information acquisition, comparing to the second best debt contract, prescribes a lower debt and an equity share of output residual. With imperfect information acquisition or private knowledge of information acquiring cost, the contract offered to an uninformed agent is qualitatively robust, and that to the informed exhibits countervailing incentives. I relax the assumption of complete contracting and study truthful information revelation in an incomplete contracting environment in the third chapter. Truthful revelation of asymmetric information through shared ownership (partnership) is incorporated into the Property Right Theory of the firms. Shared ownership is optimal as an information transmission device, when it is incentive compatible within the relationship as well as when the relationship breaks, at the expense of the ex-ante incentive to invest in the relationship-specific asset as the hold-up concern is not efficiently mitigated. Higher (lower) level of integration is optimal with a lower marginal value of asset if the information rent effect is stronger (weaker) than the hold-up effect.
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