The Informed Principal with Agent Moral Hazard

Daniel Clark (MIT)

January 31, 2022, 14:00–15:30


Room online

Job Market Seminar


We study principal-agent settings where the principal has private information, both the principal and agent take actions, and the agent’s action is subject to moral hazard. Unlike past work focusing on explicit contracts, we allow the principal to propose contracts that give them flexibility in their choice of future actions. We develop an adaptation of sequential equilibrium called contracting equilibrium for our principal-agent games, and prove its existence. In environments where the principal’s type and agent’s action are complements, we also apply a refinement called payoff-plausibility. The principal-optimal safe outcomes, which are analogs of the least-cost separating outcomes of signaling games, are always contracting equilibrium outcomes. They also provide an important payoff benchmark: Every principal type must obtain a weakly higher payoff from any payoff-plausible equilibrium. Moreover, if there are complementarities between the principal’s type and their action, payoff-plausibility selects the principal-optimal safe outcomes when the principal is restricted to offering deterministic mechanisms. Otherwise, pooling between principal types can survive payoff-plausibility, and is more prevalent than would be predicted with explicit contracts.