Working Paper: CEPR ID: DP10279
Authors: Pierre Chaigneau; Alex Edmans; Daniel Gottlieb
Abstract: This paper shows that the informativeness principle, as originally formulated by Holmstrom (1979), does not hold if the first-order approach is invalid. We introduce a "generalized informativeness principle" that takes into account non-local incentive constraints and holds generically, even without the first-order approach. Our result holds for both separable and non-separable utility functions.
Keywords: Contract Theory; Informativeness Principle; Principal-Agent Model
JEL Codes: D86; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| first-order approach invalid (C69) | original informativeness principle does not hold (D83) |
| non-local incentive constraints bind (D10) | value of a signal may be zero (C29) |
| first-order approach violated (C69) | incentive constraints are not local (D10) |
| generalized informativeness principle holds generically (D83) | set of parameters with measure zero (C25) |
| signal affects likelihood ratio between principal's preferred effort and all other efforts (D79) | generalized informativeness principle necessary (D83) |
| any signal affecting all likelihood ratios has positive value (C32) | generalized informativeness principle generically holds (D83) |