Delegated Expertise - When are Good Projects Bad News?

Walzl, Markus; Feess, Eberhard

doi:10.2139/ssrn.361180

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Delegated Expertise - When are Good Projects Bad News?

8 Pages Posted: 20 Jan 2003

See all articles by Markus Walzl

Markus Walzl

RWTH Aachen University - Chair for Economics (Microeconomics)

Eberhard Feess

Frankfurt School of Finance & Management

Date Written: October 29, 2002

Abstract

We analyze a model of delegated expertise with limited liability where both the agent's effort and his findings are unobservable. We show that the latter assumption reduces the agent's effort and the principal's profit in the unique subgame perfect equilibrium. Most interestingly, the principal's profit may decrease in the percentage of good projects if and only if the agent's findings are unobservable. Hence, good projects may be bad news for the principal.

Keywords: delegated expertise, information revelation, hidden action, limited liability

JEL Classification: D82, G21

Suggested Citation: Suggested Citation

Walzl, Markus and Feess, Eberhard, Delegated Expertise - When are Good Projects Bad News? (October 29, 2002). Available at SSRN: https://ssrn.com/abstract=361180 or http://dx.doi.org/10.2139/ssrn.361180