We develop a model of consulting (advising) where the role of the consultant is that she can reveal signals to her client which refine the client’s original private estimate of the profitability of a project. Importantly, only the client can observe or evaluate these signals (“cluesâ€), the consultant cannot. We characterize the optimal contract between the consultant and her client. It is a menu consisting of pairs of transfers specifying payments between the two parties (from the client to the consultant or vice versa) in case the project is undertaken by the client and in case it is not. The main result of the paper is that in the optimal mechanism, the consultant obtains the same profit as if she could observe the signals whose release she controls.
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Péter Eso & Balázs Szentes, 2004.
"The Price of Advice,"
Discussion Papers
1416, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D49 - Microeconomics - - Market Structure and Pricing - - - Other D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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