We study a model of informed principal with private values where the principal is risk neutral and the agent is risk averse. We show that the principal, regardless of her type, gains by not revealing her type to the agent through the contract offer. The equilibrium allocation transfers some ex-ante risk from one type of agent to the other. Despite the increase in the principal’s surplus, allocative efficiency does not necessarily improve.
Cella, M. (2005). Risky Allocations from a Risk Neutral Informed Principal. REVIEW OF ECONOMIC DESIGN, 9, 191-202 [10.1007/s10058-005-0127-9].
Risky Allocations from a Risk Neutral Informed Principal
CELLA, MICHELA
2005
Abstract
We study a model of informed principal with private values where the principal is risk neutral and the agent is risk averse. We show that the principal, regardless of her type, gains by not revealing her type to the agent through the contract offer. The equilibrium allocation transfers some ex-ante risk from one type of agent to the other. Despite the increase in the principal’s surplus, allocative efficiency does not necessarily improve.
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