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Informed Principal, Moral Hazard, and Limited Liability

Mekonnen, Teddy (2018) Informed Principal, Moral Hazard, and Limited Liability. . (Unpublished)

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I consider a moral hazard problem with risk neutral parties, limited liability, and an informed principal. The contractible outcome is correlated to both the principal's private information and the agent's hidden action. In contrast to a model without a privately informed principal or without limited liability, I show that the first-best payoff cannot be implemented by any equilibrium mechanism. Furthermore, limited liability precludes the existence of equilibrium refinements such as (Strongly) Neologism proofness.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription Paper
Additional Information:I am grateful to Eddie Dekel, Asher Wolinsky, and Bruno Strulovici for their invaluable comments.
Subject Keywords:Informed principal, limited liability, moral hazard, neologism proof, core mechanism, neutral optimum
Classification Code:JEL Classification: D82, D86
Record Number:CaltechAUTHORS:20190531-111003492
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:96006
Deposited By: Tony Diaz
Deposited On:31 May 2019 19:49
Last Modified:16 Nov 2021 17:17

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