A revelation mechanism for soft information under moral hazard

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This paper constructs a revelation mechanism to address a problem of moral hazard under soft information. The agent alone observes the stochastic outcome of her action, which she reports to the principal. Therefore the principal also faces a problem of ex post adverse selection. Economically relevant restrictions induce constraints on the principal's choice of mechanism and the Revelation Principle fails to apply. Specifically, a direct mechanism induces some pooling, which does not replicate the allocation obtained using a larger message space. Pooling also weakens the ex ante incentives. The Revelation Principle is extended to obtain type separation. A better audit relaxes frictions.

Original languageEnglish
Pages (from-to)752-763
Number of pages12
JournalJournal of Public Economic Theory
Issue number5
Publication statusPublished - Oct 2016
Externally publishedYes

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