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

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Author Info

  • 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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File URL: http://arno.uvt.nl/show.cgi?fid=4312
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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
Date of revision:
Handle: RePEc:dgr:kubcen:200212

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

Related research

Keywords: principal agent theory; moral hazard;

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References

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  1. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  2. Romer, Paul M., 2000. "Thinking and Feeling," Research Papers 1618, Stanford University, Graduate School of Business.
  3. Edi Karni, 2005. "Foundations of Bayesian Theory," Economics Working Paper Archive 524, The Johns Hopkins University,Department of Economics.
  4. Colin F. Camerer, 1997. "Progress in Behavioral Game Theory," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 167-188, Fall.
  5. Karni, Edi, 1996. "Probabilities and Beliefs," Journal of Risk and Uncertainty, Springer, vol. 13(3), pages 249-62, November.
  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. Luce, R Duncan & Krantz, David H, 1971. "Conditional Expected Utility," Econometrica, Econometric Society, vol. 39(2), pages 253-71, March.
  8. Grant, Simon & Karni, Edi, 2004. "A theory of quantifiable beliefs," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 515-546, August.
  9. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  10. Karni, Edi, 2003. " On the Representation of Beliefs by Probabilities," Journal of Risk and Uncertainty, Springer, vol. 26(1), pages 17-38, January.
  11. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  12. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
  13. Karni, Edi & Schmeidler, David, 1993. "On the Uniqueness of Subjective Probabilities," Economic Theory, Springer, vol. 3(2), pages 267-77, April.
  14. Karni, Edi & Postlewaite, Andrew, 2005. "David Schmeidler," Games and Economic Behavior, Elsevier, vol. 50(1), pages 1-2, January.
  15. Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer, vol. 20(1), pages 83-92.
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Citations

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Cited by:
  1. Marie-Louise Vierø, 2006. "Contracting in Vague Environments," Working Papers 1106, Queen's University, Department of Economics.
  2. David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility," Cowles Foundation Discussion Papers 1829, Cowles Foundation for Research in Economics, Yale University.
  3. Sadowski, Philipp, 2008. "Conditional Preference for Flexibility: Eliciting Beliefs from Behavior," MPRA Paper 8614, University Library of Munich, Germany.
  4. Philipp Sadowski, 2011. "Contingent Preference for Flexibility: Eliciting Beliefs from Behavior," Levine's Working Paper Archive 661465000000001189, David K. Levine.

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