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Contracting in Vague Environments

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Author Info
Marie-Louise Vierø () (Department of Economics, Queen's University)

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Abstract

This paper investigates the implications for contracting problems with adverse selection of assuming a more general information structure than usual. The paper applies a choice theoretic framework introduced in Olszewski (2007) and Ahn (2008) - a special case of the vague environments in Viero (2009a) - to a canonical principal-agent model with hidden information. The vague environment reflects that in many real-world contracting situations information is imprecise, and it gives rise to interesting effects. The intuition and mechanism behind the optimal contract fundamentally changes and so does the optimal contract. The results can, for example, explain patterns observed in franchising.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1106.pdf
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1106.

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Date of creation: Dec 2006
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Handle: RePEc:qed:wpaper:1106

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Related research
Keywords: contracts; vagueness; positivism; optimism; low-powered incentives; delayed contracting; incomplete contracts;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D20 - Microeconomics - - Production and Organizations - - - General

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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. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 57-82, January. [Downloadable!] (restricted)
  2. Marie-Louise Vierø, 2006. "Exactly What Happens After the Anscombe-Aumann Race? Representing Preferences in Vague Environments," Working Papers 1094, Queen's University, Department of Economics. [Downloadable!]
  3. Roland Bénabou & Jean Tirole, 2002. "Self-Confidence And Personal Motivation," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 871-915, August. [Downloadable!] (restricted)
  4. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September. [Downloadable!] (restricted)
    Other versions:
  5. Van den Steen, Eric, 2005. "On the Origin of Shared Beliefs (and Corporate Culture)," Working papers 27855, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  6. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
    Other versions:
  7. Guillaume Carlier & Ludovic Renou, 2005. "A costly state verification model with diversity of opinions," Economic Theory, Springer, vol. 25(2), pages 497-504, 02. [Downloadable!] (restricted)
  8. W. Bentley MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March. [Downloadable!]
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  9. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June. [Downloadable!]
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  10. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 83-114, January. [Downloadable!] (restricted)
  11. Van den Steen, Eric, 2005. "Too Motivated?," Working papers 18180, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  12. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
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  14. Pierpaolo Battigalli & Giovanni Maggi, 2002. "Rigidity, Discretion, and the Costs of Writing Contracts," American Economic Review, American Economic Association, vol. 92(4), pages 798-817, September. [Downloadable!]
  15. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March. [Downloadable!] (restricted)
    Other versions:
  16. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  17. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December. [Downloadable!] (restricted)
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  18. Milne, Frank & Shefrin, H. M., 1987. "Information and securities: A note on pareto dominance and the second best," Journal of Economic Theory, Elsevier, vol. 43(2), pages 314-328, December. [Downloadable!] (restricted)
  19. Rigotti, L., 1998. "Imprecise beliefs in a principal agent model," Discussion Paper 128, Tilburg University, Center for Economic Research. [Downloadable!]
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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.)

  1. Marie-Louise Vierø, 2006. "Exactly What Happens After the Anscombe-Aumann Race? Representing Preferences in Vague Environments," Working Papers 1094, Queen's University, Department of Economics. [Downloadable!]
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