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Working Paper

Information Gathering by a Principal

In the standard principal-agent model, the information structure is fixed. In this paper I allow the principal to choose his level of "informedness" before he contracts with the agent. During the contracting phase, the agent never learns what the principal knows about the state of the world. I examine the cases where the agent observes and does not observe the level of informedness that the principal chooses. The strategic nature of the model environment implies that there are both direct and indirect costs associated with the existence of high quality information. The implications for information gathering, investment, and welfare are examined for both cases.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Nosal, Ed. 2003. “Information Gathering by a Principal.” Federal Reserve Bank of Cleveland, Working Paper No. 03-07.