Contracts for acquiring information

TL;DR

This paper characterizes optimal contracts for incentivizing costly, unobservable information acquisition, revealing a decomposition involving output sharing, state-dependent transfers, and optimal distortions based on information costs.

Contribution

It introduces a novel decomposition of Pareto optimal contracts for information acquisition, detailing how incentives are structured with respect to experiments and information costs.

Findings

Optimal contracts include output sharing, state-dependent transfers, and distortions.

The fraction of output paid increases with available experiments.

When the agent's cost is mutual information, the distortion becomes decision-dependent.

Abstract

This paper studies the provision of incentives for information acquisition. Information is costly for an agent to acquire and unobservable to a principal. We show that any Pareto optimal contract has a decomposition into a fraction of output, a state-dependent transfer, and an optimal distortion. Under this decomposition: 1) the fraction of output paid is increasing in the set of experiments available to the agent, 2) the state-dependent transfer indexes contract payments to account for differences in output between states, 3) the optimal distortion exploits complementarities in the cost of information acquisition: experiment probabilities unalterable via contract payments stuck against liability limits are substituted for, the substitution occurring according to complementarities in the cost of information acquisition, and 4) if and only if the agent's cost of experimentation is mutual information, the optimal distortion takes the form of a decision-dependent transfer.