DP10279 The Generalized Informativeness Principle
|Author(s):||Pierre Chaigneau, Alex Edmans, Daniel Gottlieb|
|Publication Date:||December 2014|
|Keyword(s):||Contract theory, informativeness principle., principal-agent model|
|Programme Areas:||Labour Economics, Financial Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10279|
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.