Optimal linear contracts under common agency and uncertain central bank preferences

We analyze the effects of imperfectly known central banker’s preferences on optimal linear contracts offered by the government and an interest group. These effects depend on the type of uncertainty faced by the principals. When the central bank’s output target is uncertain the results by Campoy and Negrete (Public Choice 137:197–206, 2008) under perfectly known preferences obtain. Uncertainty about the central banker’s degree of conservatism or about its degree of “selfishness” has a multiplicative impact on the principals’ instruments in the agent’s best response function; this may generate an inflation bias independently of the type of contract offered by the interest group.