INFORMATION MANAGEMENT IN INCENTIVE PROBLEMS

We extend the standard procurement model to examine how an agent is op timally induced to acquire valuable planning information before he cho oses an unobservable level of cost-reducing effort. Concerns about inf ormation acquisition cause important changes in standard incentive con tracts. Reward structures with extreme financial payoffs arise, and su per-high-powered contracts are coupled with contracts that entail pron ounced cost sharing. However, if the principal can assign the planning and production tasks to two different agents, then all contracting di stortions disappear and, except for forgone economies of scope, the pr incipal achieves her most preferred outcome.