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 |
| JEL(s): | D86, J33 |
| Programme Areas: | Labour Economics, Financial Economics |
| Link to this Page: | 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.