negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor …'s investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the …

This paper shows that the informativeness principle does not automatically extend to settings with limited liability …. Even if a signal is informative about effort, it may have no value for contracting. An agent with limited liability is paid … payment cannot fall further and so the principal cannot make use of the signal. Similarly, a principal with limited liability …

-neutrality and limited liability, where the optimal contract is a call option. The direct effect of reducing signal volatility is a …