Information Acquisition and Risk Management : A Principal-Agent Analysis

The paper considers a bank's investment in a risky asset when it is possible to collect additional information about the asset's return. The analysis assumes that the bank is risk-neutral and faces a constraint as to the risk it may take. We analyze the problem of delegating the acquisition of information to a risk-neutral agent who is subject to limited liability when the agent's effort and the acquired information are not observable and characterize optimal incentive schemes that implement a given level of effort and result in truthful disclosure of information. Moreover, we study the bank's incentive to acquire information under alternative capital constraints