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Why Does it Matter that Beliefs and Valuations be Correctly Represented?

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  • Grant, S.
  • Karni, E.

    (Tilburg University, Center for Economic Research)

Abstract

This paper contains an analysis of a simple principal-agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent's beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal indices the agent to choose an action that is not in the principal's best interest.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-12.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200212

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

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References

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  1. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  2. Romer, Paul M., 2000. "Thinking and Feeling," Research Papers 1618, Stanford University, Graduate School of Business.
  3. Karni, E. & Schmeidler, D., 1991. "On the Uniqueness of Subjective Probabilities," Papers 1-92, Tel Aviv - the Sackler Institute of Economic Studies.
  4. Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer, vol. 20(1), pages 83-92.
  5. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  6. Edi Karni & Philippe Mongin, 2000. "On the Determination of Subjective Probability by Choices," Management Science, INFORMS, vol. 46(2), pages 233-248, February.
  7. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  8. Karni, Edi, 2003. " On the Representation of Beliefs by Probabilities," Journal of Risk and Uncertainty, Springer, vol. 26(1), pages 17-38, January.
  9. Grant, Simon & Karni, Edi, 2004. "A theory of quantifiable beliefs," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 515-546, August.
  10. Luce, R Duncan & Krantz, David H, 1971. "Conditional Expected Utility," Econometrica, Econometric Society, vol. 39(2), pages 253-71, March.
  11. Karni, Edi, 2007. "Foundations of Bayesian theory," Journal of Economic Theory, Elsevier, vol. 132(1), pages 167-188, January.
  12. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  13. Paul M. Romer, 2000. "Thinking and Feeling," American Economic Review, American Economic Association, vol. 90(2), pages 439-443, May.
  14. Karni, Edi, 1996. "Probabilities and Beliefs," Journal of Risk and Uncertainty, Springer, vol. 13(3), pages 249-62, November.
  15. Karni, Edi & Postlewaite, Andrew, 2005. "David Schmeidler," Games and Economic Behavior, Elsevier, vol. 50(1), pages 1-2, January.
  16. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  17. Colin F. Camerer, 1997. "Progress in Behavioral Game Theory," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 167-188, Fall.
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Citations

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Cited by:
  1. Sadowski, Philipp, 2008. "Conditional Preference for Flexibility: Eliciting Beliefs from Behavior," MPRA Paper 8614, University Library of Munich, Germany.
  2. Philipp Sadowski, 2011. "Contingent Preference for Flexibility: Eliciting Beliefs from Behavior," Levine's Working Paper Archive 661465000000001189, David K. Levine.
  3. David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2012. "Optimism and Pessimism with Expected Utility," Levine's Working Paper Archive 786969000000000353, David K. Levine.
  4. Marie-Louise Vierø, 2006. "Contracting in Vague Environments," Working Papers 1106, Queen's University, Department of Economics.

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