Template-type: ReDif-Paper 1.0
Author-Name: Feess, Eberhard 
Author-Name: Walzl, Markus  
Author-workplace-name: METEOR
Title: Why it Pays to Conceal - On the Optimal Timing of Acquiring Verifiable Information
Abstract: We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs ($%IT_{P}$), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability ($IT_A$). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e. a \emph{disclosure} contract offered to the agent after the principal announced the result of $% IT_{P}$, and a \emph{concealment} contract where the agent exerts effort before $IT_{P}$ is checked. We find that oncealment is superior whenever the quality of $IT_{P}$ is sufficiently low. Then, $IT_{P}$ is almostworthless under a disclosure contract, while it can still be exploited to reduce the agent''s information rent under concealment. If the quality of $% IT_{P}$ improves, disclosure can be superior as it allows to adjust the agent''s effort to the up-dated expected quality of the project. However, even for a highly informative $IT_{P}$, concealment can be superior as itmitigates the adverse selection problem. Finally, we prove that the principal always benefits from checking $IT_P$ \textit{if} he chooses the optimal timing of information release. In particular, he may benefit only if he does not check $IT_P$ until the agent reported his findings.  
Keywords: management information; 
Series: Research Memoranda
Creation-Date: 2006
Number: 020
File-URL: http://arnop.unimaas.nl/show.cgi?fid=4753
File-Format: application/pdf
File-Size: 276851
Handle: RePEc:unm:umamet:2006020