Working Paper: NBER ID: w20729
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: Informativeness Principle; Contract Theory; Moral Hazard
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 is invalid (C69) | informativeness principle may not hold (D83) |
| invalid first-order approach (C69) | zero expected value of a signal (C29) |
| signal affects likelihood ratio (C52) | agent's incentives (L85) |
| signal must affect all incentive constraints (D10) | positive value of signal (D46) |
| informativeness principle holds for separable and nonseparable utility functions (D11) | broader applicability of findings (C90) |