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Contracts and uncertainty

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Author Info

  • Sandroni, Alvaro

    ()
    (University of Pennsylvania and Northwestern University)

  • Olszewski, Wojciech

    ()
    (Northwestern University)

Abstract

A 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 Info

Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 2 (2007)
Issue (Month): 1 (March)
Pages: 1-13

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Handle: RePEc:the:publsh:153

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Web page: http://econtheory.org

Related research

Keywords: Contracts; uncertainty; experts; minmax theorems;

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Cited by:
  1. Wojciech Olszewski & Alvaro Sandroni, 2008. "Manipulability of Future-Independent Tests," Econometrica, Econometric Society, vol. 76(6), pages 1437-1466, November.
  2. Al-Najjar, Nabil & Sandroni, Alvaro, 2013. "A difficulty in the testing of strategic experts," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 5-9.
  3. Alvaro Sandroni & Wojciech Olszewski, 2008. "Falsifiability," PIER Working Paper Archive 08-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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