Interim Information in Long-Term Contracts

"We study how long-term contracts condition on a natural flow of information that reduces asymmetric information over time. If such interim information is verifiable, optimal contracts achieve the first best. Under nonverifiability, the optimal contract depends on the signal's accuracy and timing. Introducing signal manipulation as a parameterization of verifiability reveals a trade-off between accuracy and manipulability. Signals that are accurate, received early, or hard to manipulate enable the principal to extract all rents and adjust allocations closer to the first best. Imprecise, late, and manipulable signals affect only future allocations and leave rents to efficient types." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.