Principal and Expert Agent

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Principal and Expert Agent

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James Malcomson

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James M Malcomson

Abstract

This paper analyses principal-agent contracts when the agent`s action generates information not directly verifiable but used by the agent to make a risky decision. It considers a more general formulation than those studied previously, focusing on the impact on the decision made and the contract between principal and agent. It establishes a precise sense in which distorting decisions reduces the risk borne by a risk-averse agent and conditions under which implementing an optimal decision rule imposes no substantive restrictions on the contract. The paper also uses an application to bidding to supply a good or service to illustrate those results and derive additional ones. A risk-neutral agent with limited liability may optimally choose lower, less risky bids or higher, more risky bids, according to which relaxes the limited liability constraint. There are also natural conditions under which optimal contracts are monotone, possibly with flat sections, like stock option rewards.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 193.

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Date of creation: 2004
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Handle: RePEc:oxf:wpaper:193

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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.:

Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July. [Downloadable!] (restricted)
Other versions:
- Khalil, F & Rochet, J-C, 1997. "Strategic Information Gathering Before a Contract is Offered," Discussion Papers in Economics at the University of Washington 97-15, Department of Economics at the University of Washington.
- Khalil, F & Rochet, J-C, 1997. "Strategic Information Gathering Before a Contract is Offered," Working Papers 97-15, University of Washington, Department of Economics.
- CRÉMER, Jacques & KHALIL, Fahad & ROCHET, Jean-Charles, 1996. "Strategic Information Gathering Before a Contract Is Offered," IDEI Working Papers 61, Institut d'Économie Industrielle (IDEI), Toulouse.
- Cremer, J. & Khalil, F & Rochet, J.-C., 1996. "Strategic Information Gathering Before a Contract is Offered," Papers 976.425, Toulouse - GREMAQ.
- Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Strategic Information Gathering Before a Contract is Offered," Discussion Paper Series In Economics And Econometrics 9708, Economics Division, School of Social Sciences, University of Southampton.
Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-37, Spring.
Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
Other versions:
- AGHION, Philippe & TIROLE, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
- Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
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Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, vol. 25(2), pages 174-193, November. [Downloadable!] (restricted)
Other versions:
- Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Working Papers 97-16, University of Washington, Department of Economics.
- Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and Productive Information Gathering," Discussion Paper Series In Economics And Econometrics 9707, Economics Division, School of Social Sciences, University of Southampton.
- Khalil, F & Rochet, J-C, 1997. "Contracts and Productive Information Gathering," Discussion Papers in Economics at the University of Washington 97-16, Department of Economics at the University of Washington.
- Cremer, J. & Khalil, F. & Rochet, J-C., 1997. "Contracts and Productive Information Gathering," Papers 97.468, Toulouse - GREMAQ.
Paul Povel & Michael Raith, 2004. "Optimal Debt with Unobservabable Investments," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 599-616, Autumn.
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Feess, Eberhard & Walzl, Markus, 2004. "Delegated expertise--when are good projects bad news?," Economics Letters, Elsevier, vol. 82(1), pages 77-82, January. [Downloadable!] (restricted)
Dezsö SZALAY, 2004. "Contracts with Endogenous Information," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 04.05, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
Other versions:
- Dezso Szalay, 2006. "Contracts with Endogenous Information," The Warwick Economics Research Paper Series (TWERPS) 780, University of Warwick, Department of Economics. [Downloadable!]
Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
Other versions:
- Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
Barron, John M. & Waddell, Glen R., 2003. "Executive rank, pay and project selection," Journal of Financial Economics, Elsevier, vol. 67(2), pages 305-349, February. [Downloadable!] (restricted)
Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September. [Downloadable!] (restricted)
Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08. [Downloadable!] (restricted)
Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter. [Downloadable!] (restricted)
Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-78, June. [Downloadable!] (restricted)
Other versions:
- CRÉMER, Jacques & KHALIL, Fahad, 1991. "Gathering Information before Signing a Contract," IDEI Working Papers 5, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
- Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Working Papers 91-16, University of Washington, Department of Economics.
- Cremer, J. & Khalil, F., 1991. "Gathering Information Before Signing a Contract," Discussion Papers in Economics at the University of Washington 91-16, Department of Economics at the University of Washington.

Full references

Cited by:
(explanations, 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.)

GROMB, Denis & MARTIMORT, David, 2004. "The Organization of Delegated Expertise," IDEI Working Papers 284, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
Marcoul, Philippe, 2003. "A Theory of Advice Based on Information Search Incentives," Staff General Research Papers 10357, Iowa State University, Department of Economics. [Downloadable!]

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