Effort Misallocation and the Value of Signals
What is the relationship between effort misallocation and the value of signals in hidden action models? In this class of models, relevant actions cannot be contractually fixed. The inability of one party to commit to the efficient action entails an efficiency loss. In other words, there are costs of non-contractibility. Signals may help to reduce the costs of non-contractibility: By conditioning payments on signals, otherwise not contractible actions can be induced.
KeywordsAgency Cost Incentive Scheme Signal Vector Benefit Function Effort Choice
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