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"Insurance Reversal" in an Agency Model With Uncertainty

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  • Nicola Dimitri

Abstract

The paper introduces Knightian uncertainty, formalized by non-additive probabilities, within a simple agency model. The framework appears to be suitable to deal with issues like delegation in innovative firms. The paper stresses that, with Knightian uncertainty, if the principal is pessimistic and the agent optimistic, the optimal contract may reverse the findings of the standard agency model with observability. Namely, the principal would fully insure himself across states of nature while the agent's reward will be state-dependent. Hence, enven with observability, uncertainty could 'require' the agent's compensation to operate as an incentive mechanism.

Suggested Citation

  • Nicola Dimitri, 1999. ""Insurance Reversal" in an Agency Model With Uncertainty," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(3), pages 516-516, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199909)155:3_516:iriaam_2.0.tx_2-p
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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