The Informativeness Principle Without the First-Order Approach
39 Pages Posted: 19 Nov 2014 Last revised: 28 Aug 2018
Date Written: August 15, 2018
Holmström (1979) provides a condition for a signal to have positive value assuming the validity of the first-order approach. This paper extends Holmström's analysis to settings where the first-order approach may not hold. We provide a new condition for a signal to have positive value that takes non-local incentive constraints into account and holds generically. Our condition is the weakest condition possible in the absence of restrictions on the utility function.
Keywords: Contract theory, principal-agent model, informativeness principle
JEL Classification: D86, J33
Suggested Citation: Suggested Citation