Why Does it Matter that Beliefs and Valuations be Correctly Represented?
AbstractThis 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 InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-12.
Date of creation: 2002
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principal agent theory; moral hazard;
Other versions of this item:
- Simon Grant & Edi Karni, 2005. "Why Does It Matter That Beliefs And Valuations Be Correctly Represented?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 917-934, 08.
- Grant, Simon & Karni, Edi, 2003. "Why Does It Matter That Beliefs and Valuations Be Correctly Represented?," Working Papers 2003-02, Rice University, Department of Economics.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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