Abstract
This paper studies the value of information under limited liability. With limited liability on the agent, informative signals may have no value for contracting. Since the agent is paid zero for outputs that suggest low effort, even if these outputs are accompanied by an unfavorable signal, the wage cannot fall further and so the principal cannot make use of the signal. Similarly, for outputs that suggest high effort, limited liability on the principal or a constraint that her contract be monotonic prevents the wage from rising further with a favorable signal. We derive necessary and sufficient conditions for a signal to have value under limited liability.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
