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Why Does It Matter That Beliefs and Valuations Be Correctly Represented?

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Author Info

  • Grant, Simon

    (Rice U)

  • Karni, Edi

    (Johns Hopkins U)

Abstract

This paper contains an analysis of a simple principal-agent problem illustrating possible problems that arise when the principal 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 induces the agent to choose an action that is not in the principal's best interest.

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File URL: http://www.ruf.rice.edu/~econ/papers/2003papers/02Grant.pdf
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Bibliographic Info

Paper provided by Rice University, Department of Economics in its series Working Papers with number 2003-02.

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Date of creation: Jul 2003
Date of revision:
Handle: RePEc:ecl:riceco:2003-02

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References

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

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Cited by:
  1. David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility, Third Version," PIER Working Paper Archive 13-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 26 Dec 2012.
  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. Philipp Sadowski, 2011. "Contingent Preference for Flexibility: Eliciting Beliefs from Behavior," Levine's Working Paper Archive 661465000000001189, David K. Levine.
  4. David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility, Fourth Version," PIER Working Paper Archive 13-068, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Nov 2013.
  5. Sadowski, Philipp, 2013. "Contingent preference for flexibility: eliciting beliefs from behavior," Theoretical Economics, Econometric Society, vol. 8(2), May.
  6. Marie-Louise Vierø, 2006. "Contracting in Vague Environments," Working Papers 1106, Queen's University, Department of Economics.
  7. Sadowski, Philipp, 2008. "Conditional Preference for Flexibility: Eliciting Beliefs from Behavior," MPRA Paper 8614, University Library of Munich, Germany.
  8. David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility, Second Version," PIER Working Paper Archive 12-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 10 Aug 2012.

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