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Communication in Private-Information Models: Theory and Computation

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  • Edward Simpson Prescott

    (Federal Reserve Bank of Richmond, e-mail: edward.prescott@rich.frb.org)

Abstract

Communication and no-communication versions of a two-stage principal-agent model are compared. The models contain a risk-averse agent and two sources of private information, a shock to preferences followed by a productive action. Both models are formulated as linear programs, which are then used to compute solutions to examples. For the communication model, an alternative method of accounting for the utility from off-equilibrium strategies is derived. This method greatly reduces the size of the linear program. For the no-communication model a Revelation-Principle like proof is provided. In simple cases, a sufficient condition for communication to be valuable is derived. In these cases, communication improves risk-sharing in bad states of the world. In more complicated cases, computed examples demonstrate how communication may also alter labor supply. Further examples demonstrate how action and consumption lotteries may separate agents by their shock. The Geneva Papers on Risk and Insurance Theory (2003) 28, 105–130. doi:10.1023/A:1026388604459

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 28 (2003)
Issue (Month): 2 (December)
Pages: 105-130

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Handle: RePEc:pal:genrir:v:28:y:2003:i:2:p:105-130

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Cited by:
  1. David A. Marshall & Edward Simpson Prescott, 2004. "State-Contingent Bank Regulation With Unobserved Actionas And Unobserved Characteristics," Working Papers, CEMFI wp2004_0407, CEMFI.
  2. Alexander Karaivanov & Robert M. Townsend, 2013. "Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes," NBER Working Papers 19617, National Bureau of Economic Research, Inc.
  3. Edward S. Prescott & Robert M. Townsend, 2003. "Mechanism design and assignment models," Working Paper, Federal Reserve Bank of Richmond 03-09, Federal Reserve Bank of Richmond.
  4. Robert M. Townsend & Jacob Yaron, 2001. "The credit risk-contingency system of an Asian development bank," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 31-48.

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