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The Economics of Clear Advice and Extreme Options

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  • Dezsö SZALAY

Abstract

This paper is about freedom of choice and rigidity of choice rules as incentive devices. We study the optimal design of an agent's freedom of choice when his information is endogenous and costly to acquire. We show that curtailing the agent's authority over decision-making may be optimal even if the agent's and the principal's ex post objectives coincide. The agent is forced to depart from prior optimal choices and to take a clear stance on a matter. Having the agent choose from extreme options is derived as a second best optimal contract when his information acquisition technology is "success enhancing" and use of contingent monetary compensation infeasible.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 03.09.

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Length: 37 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:lau:crdeep:03.09

Contact details of provider:
Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
Email:
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Related research

Keywords: discretion; freedom of action; endogenous information;

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Cited by:
  1. De Jaegher, Kris, 2010. "Physician incentives: Cure versus prevention," Journal of Health Economics, Elsevier, vol. 29(1), pages 124-136, January.
  2. Alonso, Ricardo & Matouschek, Niko, 2005. "Optimal Delegation," CEPR Discussion Papers 5289, C.E.P.R. Discussion Papers.
  3. Kolotilin, Anton & Li, Hao & Li, Wei, 2013. "Optimal limited authority for principal," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2344-2382.
  4. Flavia Roldán, 2013. "The organization of expertise in the presence of communication," Review of Economic Design, Springer, vol. 17(1), pages 63-81, March.
  5. Wolfgang R. Köhler, 2004. "Optimal Incentive Contracts for Experts," Bonn Econ Discussion Papers bgse6_2004, University of Bonn, Germany.
  6. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," Games and Economic Behavior, Elsevier, vol. 82(C), pages 15-30.
  7. K.J.M. De Jaegher, 2007. "Expert incentives: cure versus prevention," Working Papers 07-08, Utrecht School of Economics.
  8. Conlin, Michael & Orsini, Joe & Tang, Meng-Chi, 2013. "The effect of an agent’s expertise on National Football League contract structure," Economics Letters, Elsevier, vol. 121(2), pages 275-281.
  9. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," MPRA Paper 45271, University Library of Munich, Germany.
  10. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.
  11. Aggey Semenov, 2012. "Delegation to a potentially uninformed agent," Working Papers 1215E, University of Ottawa, Department of Economics.
  12. Kovác, Eugen & Krähmer, Daniel, 2013. "Optimal Sequential Delegation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 427, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  13. Dezsö Szalay & Ramon Arean, 2005. "Communicating with a Team of Experts," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.12, Université de Lausanne, Faculté des HEC, DEEP.

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