A revelation mechanism for soft information under moral hazard

Authors

Guillaume Roger, University of SydneyFollow

RIS ID

112280

Publication Details

Roger, G. (2016). A revelation mechanism for soft information under moral hazard. Journal of Public Economic Theory, 18 (5), 752-763.

Abstract

This paper constructs a revelation mechanism to address a problem of moral hazard under soft information. The agent alone observes the stochastic outcome of her action, which she reports to the principal. Therefore the principal also faces a problem of ex post adverse selection. Economically relevant restrictions induce constraints on the principal's choice of mechanism and the Revelation Principle fails to apply. Specifically, a direct mechanism induces some pooling, which does not replicate the allocation obtained using a larger message space. Pooling also weakens the ex ante incentives. The Revelation Principle is extended to obtain type separation. A better audit relaxes frictions.