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.