The paper by Bengt Holmström analyzes moral hazard and the role of imperfect information in principal-agent relationships. It shows that imperfect information can improve contracts based on payoff alone and provides a characterization of optimal use of such information. The paper considers a principal-agent relationship where the agent's action cannot be observed directly. The principal must use imperfect information to design contracts that provide incentives for the agent to take the correct actions. The paper derives a necessary and sufficient condition for imperfect information to improve on contracts based on payoff alone and shows that any additional information about the agent's action can be used to improve welfare for both the principal and the agent. The paper also characterizes optimal contracts based on imperfect information and shows that they provide insight into the complex structure of actual contracts. The paper discusses the use of imperfect information in various contexts, including insurance and managerial accounting, and shows that it is extensively used in practice to alleviate moral hazard. The paper concludes that any imperfect information about actions or states of nature can be used to improve contracts, which explains the complexity of real contracts. The paper also discusses the value of information in contracting and shows that additional information can be used to improve contracts by allowing a more accurate judgment of the agent's performance. The paper provides a basis for studying the design of contracts and information systems in more specific contexts and discusses applications in various fields, including financial reporting. The paper also considers the effects of long-term relationships and the possibility of re-negotiating contracts based on new information. The paper concludes that the analysis provides a framework for understanding the functioning of principal-agent relationships and the role of imperfect information in contracting.The paper by Bengt Holmström analyzes moral hazard and the role of imperfect information in principal-agent relationships. It shows that imperfect information can improve contracts based on payoff alone and provides a characterization of optimal use of such information. The paper considers a principal-agent relationship where the agent's action cannot be observed directly. The principal must use imperfect information to design contracts that provide incentives for the agent to take the correct actions. The paper derives a necessary and sufficient condition for imperfect information to improve on contracts based on payoff alone and shows that any additional information about the agent's action can be used to improve welfare for both the principal and the agent. The paper also characterizes optimal contracts based on imperfect information and shows that they provide insight into the complex structure of actual contracts. The paper discusses the use of imperfect information in various contexts, including insurance and managerial accounting, and shows that it is extensively used in practice to alleviate moral hazard. The paper concludes that any imperfect information about actions or states of nature can be used to improve contracts, which explains the complexity of real contracts. The paper also discusses the value of information in contracting and shows that additional information can be used to improve contracts by allowing a more accurate judgment of the agent's performance. The paper provides a basis for studying the design of contracts and information systems in more specific contexts and discusses applications in various fields, including financial reporting. The paper also considers the effects of long-term relationships and the possibility of re-negotiating contracts based on new information. The paper concludes that the analysis provides a framework for understanding the functioning of principal-agent relationships and the role of imperfect information in contracting.