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Imprecise Beliefs in a Principal Agent Model

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  • Rigotti, L.

    (Tilburg University, Center for Economic Research)

Abstract

This paper presents a principal-agent model where the agent has multiple, or imprecise, beliefs. We model this situation formally by assuming the agent's preferences are incomplete. One can interpret this multiplicity as an agent's limited knowledge of the surrounding environment. In this setting, incentives need to be robust to the agent's different beliefs. We study whether robustness implies simplicity. Under mild conditions, we show the unique optimal contract has a two-wage structure; a °at payment and bonus. That is, all output levels are divided into two groups, and the optimal incentive scheme pays the same amount for all output levels in each group. We also show that a two-state two-action framework can be thought of as a reduced form of the original model. We solve explicitly the principal's problem in this case, and discuss some implications of our model for firm ownership.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-128.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:1998128

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Web page: http://center.uvt.nl

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Cited by:
  1. Karni, Edi, 2009. "A reformulation of the maxmin expected utility model with application to agency theory," Journal of Mathematical Economics, Elsevier, vol. 45(1-2), pages 97-112, January.
  2. Marie-Louise Vier�, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 104-30, May.
  3. Kelsey, David & Yalcin, Erkan, 2007. "The arbitrage pricing theorem with incomplete preferences," Mathematical Social Sciences, Elsevier, vol. 54(1), pages 90-105, July.
  4. Brigitte Godbillon-Camus, 2003. "Subjective evaluation, ambiguity and relational contracts," Working Papers of LaRGE Research Center 2003-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

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