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Contracts for Experts with Opposing Interests

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Author Info
Tymofiy Mylovanov (Penn State University)
Andriy Zapechelnyuk () (University of Bonn and Kyiv School of Economics)

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Abstract

We study the problem of optimal contract design in an environment with an uninformed decision maker and two perfectly informed experts. The experts can be paid for their advice but have limited liability, i.e., the payments cannot be negative. In order to characterize optimal contracts for the decision maker, we prove a "constant-threat principle" that states that one can restrict attention to contracts in which the action implemented in case of a disagreement among the experts is independent of their reports. This result tremendously reduces the complexity of the contract design problem. We describe optimal contracts and, in particular, provide some necessary and sufficient conditions under which these contracts implement the first best outcome at zero cost. Furthermore, we show that in a class of standard environments the optimal contract employs no payments to the experts even if the first best outcome is not implemented. We compare optimal contracts in our model with optimal contracts in environments with one expert and observe that adding a second expert is always valuable; this is so even if the bias of the expert is arbitrary large.

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File URL: http://www.kse.org.ua/RePEc/pdf/KSE_dp5.pdf
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File Function: Revised version, September 2009
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Publisher Info
Paper provided by Kyiv School of Economics in its series Discussion Papers with number 5.

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Date of creation: Jan 2008
Date of revision: Sep 2009
Handle: RePEc:kse:dpaper:5

Note: Under review in Journal of Economic Theory
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Web page: http://www.kse.org.ua/
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Related research
Keywords: information; optimal contracts; experts; constant-threat principle;

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Marco Battaglini, 2002. "Multiple Referrals and Multidimensional Cheap Talk," Econometrica, Econometric Society, vol. 70(4), pages 1379-1401, July. [Downloadable!] (restricted)
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  2. Ambrus, Attila & Takahashi, Satoru, 2008. "Multi-sender cheap talk with restricted state spaces," Theoretical Economics, Society for Economic Theory, vol. 3(1), pages 1-27, March. [Downloadable!]
  3. Paul Milgrom & John Roberts, 1986. "Relying on the Information of Interested Parties," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 18-32, Spring. [Downloadable!] (restricted)
    Other versions:
  4. Vijay Krishna & John Morgan, 2001. "A Model Of Expertise," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 747-775, May. [Downloadable!] (restricted)
    Other versions:
  5. Austen-Smith David, 1993. "Interested Experts and Policy Advice: Multiple Referrals under Open Rule," Games and Economic Behavior, Elsevier, vol. 5(1), pages 3-43, January. [Downloadable!] (restricted)
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