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 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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Bibliographic InfoPaper provided by Rice University, Department of Economics in its series Working Papers with number 2003-02.
Date of creation: Jul 2003
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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, S. & Karni, E., 2002. "Why Does it Matter that Beliefs and Valuations be Correctly Represented?," Discussion Paper 2002-12, Tilburg University, Center for Economic Research.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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