Risk-neutral individuals take more risky decisions when they have limited liability. Risk-neutral managers may not when acting as agents under contract and taking costly actions to acquire information before taking decisions. Limited liability makes it optimal to increase the reward for outcomes...

Rothschild and Stiglitz (1976) show that there need not exist a competitive equilibrium in markets with adverse selection. Building on their framework we demonstrate that externalities between agents - an agent's utility upon accepting a contract depends on the average type attracted by the...

I analyze common agency games in which the principals, and possibly the agent, have private information. I distinguish between games in which the principals delegate the final decisions to the agent, and games in which they retain some decision power after offering their mechanisms. I show that,...

When the information used by a principal to monitor an agent is private, and thus non-verifiable by a third party, the principal has a credibility issue with the agent. The agent should be concerned that the principal could misrepresent the information in order to collect a monetary penalty from...

The decision to cooperate within R&D joint ventures is often based on expert advice such advice typically originates in a due diligence process, which assesses the R&D joint ventures profitability, for example, by appraising the achievability of synergies. We show that if the experts who advise...

Although stock options are commonly observed in chief executive o±cer (CEO) compensation contracts, there is theoretical controversy about whether stock options are part of the optimal contract. Using a sample of Fortune 500 companies, we solve an agency model calibrated to the company-specific...

We revisit the contract-theoretic literature on privatization initiated by Hart et al. (1997). This literature has two major shortcomings. First, it is focused on ex-ante investment incentives, whereas ex-post inefficiencies which are ubiquitous in the real world cannot be explained. Second,...

An issuer, privately informed about the distribution of the project's cash flows, raises financing from an uninformed investor through a security sale. The investor faces Knightian uncertainty about the distribution of cash flows and evaluates each security by the worst-case distribution at...

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...