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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.

Keywords: Principal-agent model, efficiency of information acquisition

JEL Classification: D82, C72


Suggested citation: Nosal, Ed, 2003. "Information Gathering by a Principal,” Federal Reserve Bank of Cleveland, Working Paper, no. 03-07.

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