Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support

Is no News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model

Steven D. Levitt and Christopher M. Snyder
The RAND Journal of Economics
Vol. 28, No. 4 (Winter, 1997), pp. 641-661
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555780
Page Count: 21
  • Get Access
  • Read Online (Free)
  • Download ($24.00)
  • Cite this Item
If you need an accessible version of this item please contact JSTOR User Support
Is no News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model
Preview not available

Abstract

The standard principal-agent model neglects the potentially important role of information transmission from agent to principal. We study optimal incentive contracts when the agent has a private signal of the likelihood of the project's success. We show that the principal can costlessly extract this signal if and only if this does not lead her to intervene in the project in any way that will influence its outcome. Intervention undermines incentives by weakening the link between the agent's initial effort and the project's outcome. If possible, the principal commits not to cancel some projects with negative expected payoffs. To elicit early warning, contracts must reward agents for coming forward with bad news.

Page Thumbnails

  • Thumbnail: Page 
641
    641
  • Thumbnail: Page 
642
    642
  • Thumbnail: Page 
643
    643
  • Thumbnail: Page 
644
    644
  • Thumbnail: Page 
645
    645
  • Thumbnail: Page 
646
    646
  • Thumbnail: Page 
647
    647
  • Thumbnail: Page 
648
    648
  • Thumbnail: Page 
649
    649
  • Thumbnail: Page 
650
    650
  • Thumbnail: Page 
651
    651
  • Thumbnail: Page 
652
    652
  • Thumbnail: Page 
653
    653
  • Thumbnail: Page 
654
    654
  • Thumbnail: Page 
655
    655
  • Thumbnail: Page 
656
    656
  • Thumbnail: Page 
657
    657
  • Thumbnail: Page 
658
    658
  • Thumbnail: Page 
659
    659
  • Thumbnail: Page 
660
    660
  • Thumbnail: Page 
661
    661