Contracts and uncertainty
AbstractA decision maker, named Alice, wants to know if an expert has significant information about payoff-relevant probabilities of future events. The expert, named Bob, either knows this probability almost perfectly or knows nothing about it. Hence, both Alice and the uninformed expert face uncertainty: they do not know the payoff-relevant probability. Alice offers a contract to Bob. If he accepts this contract then he must announce the probability distribution before any data are observed. Once the data unfold, transfers between Alice and Bob occur. It is demonstrated that if the informed expert accepts some contract then the uninformed expert also accepts this contract. Hence, Alice's adverse selection problem cannot be mitigated by screening contracts that separate informed from uninformed experts. This result stands in contrast with the analysis of contracts under risk, where separation is often feasible.
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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 2 (2007)
Issue (Month): 1 (March)
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Web page: http://econtheory.org
Contracts; uncertainty; experts; minmax theorems;
Find related papers by JEL classification:
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
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- Alvaro Sandroni & Wojciech Olszewski, 2008. "Falsifiability," PIER Working Paper Archive 08-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Al-Najjar, Nabil & Sandroni, Alvaro, 2013. "A difficulty in the testing of strategic experts," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 5-9.
- Wojciech Olszewski & Alvaro Sandroni, 2008.
"Manipulability of Future-Independent Tests,"
Econometric Society, vol. 76(6), pages 1437-1466, November.
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