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GETTING TO KNOW YOUR AGENT: INTERIM INFORMATION IN LONG TERMCONTRACTUAL RELATIONSHIPS
Category: Economic Theory
Principal-Agent Models Monday 26th August 2002, 14:30 - 16:00, Room: 1.4
Session Chair(s):
David Pérez-Castrillo, Universitat Autonoma de Barcelona, SPAIN
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Abstract:
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In a finitely repeated principal agent relationship with
adverse selection I study (exogenous) interim information that is
revealed during a long term relationship. Interim information mitigates
adverse selection. Verifiability, measured by the cost of signal
manipulation, and the signal's informativeness determine the use and
effectiveness of interim information: Less precise and more manipulable
signals are used in a forward looking way exclusively. More precise and
less manipulable signals are also used in a backward looking
way and extract all information rents. Highly precise signals with a
high degree of verifiability yield the first best. Moreover,
verifiability and informativeness are substitutes.
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