Moral hazard with discrete soft information.

I study a simple model of moral hazard with soft information. The risk-averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection. With limited instruments, the principal cannot solve these two problems independently. To accommodate ex post information revelation, he must distort the transfer schedule, as compared to the standard moral hazard problem. Then effort is implemented for a smaller set of parameters than in the standard problem. These results are robust and suggest high-power contracts may have to be revisited when information is soft.