IDEAS home Printed from https://ideas.repec.org/a/bpj/bejtec/v8y2008i1n10.html
   My bibliography  Save this article

On the Role of Uncertainty in the Risk-Incentives Tradeoff

Author

Listed:
  • Rantakari Heikki V

    () (University of Southern California)

Abstract

We use a simple agency model to clarify and characterize the various avenues through which changes in the level of uncertainty impact the optimal strength of linear incentives. Instead of attempting to characterize different "types" of uncertainty, which has been the approach in the literature so far, we base our characterization on the link between uncertainty and the agent's action choice. We then use this characterization to provide conditions under which the relationship between uncertainty and incentives can be positive and relate it back to the existing models in the literature.

Suggested Citation

  • Rantakari Heikki V, 2008. "On the Role of Uncertainty in the Risk-Incentives Tradeoff," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-25, April.
  • Handle: RePEc:bpj:bejtec:v:8:y:2008:i:1:n:10
    as

    Download full text from publisher

    File URL: https://www.degruyter.com/view/j/bejte.2008.8.1/bejte.2008.8.1.1407/bejte.2008.8.1.1407.xml?format=INT
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. Neeman, Zvika, 2004. "The relevance of private information in mechanism design," Journal of Economic Theory, Elsevier, pages 55-77.
    3. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, pages 163-200.
    4. Martinelli, Cesar, 2006. "Would rational voters acquire costly information?," Journal of Economic Theory, Elsevier, pages 225-251.
    5. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, pages 174-193.
    6. Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
    7. Dirk Bergemann & Stephen Morris, 2005. "Robust Mechanism Design," Econometrica, Econometric Society, vol. 73(6), pages 1771-1813, November.
    8. Hanming Fang & Stephen Morris, 2012. "Multidimensional Private Value Auctions," World Scientific Book Chapters,in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 9, pages 319-356 World Scientific Publishing Co. Pte. Ltd..
    9. Michihiro Kandori & Ichiro Obara, 2006. "Efficiency in Repeated Games Revisited: The Role of Private Strategies," Econometrica, Econometric Society, vol. 74(2), pages 499-519, March.
    10. d'Aspremont, Claude & Cremer, Jacques & Gerard-Varet, Louis-Andre, 2004. "Balanced Bayesian mechanisms," Journal of Economic Theory, Elsevier, vol. 115(2), pages 385-396, April.
    11. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, pages 566-578.
    12. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, pages 303-328.
    13. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
    14. Gerardi, Dino & Yariv, Leeat, 2008. "Information acquisition in committees," Games and Economic Behavior, Elsevier, pages 436-459.
    15. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, vol. 68(2), pages 309-342, March.
    16. Fudenberg, Drew & Levine, David I & Maskin, Eric, 1994. "The Folk Theorem with Imperfect Public Information," Econometrica, Econometric Society, vol. 62(5), pages 997-1039, September.
    17. d'Aspremont, C. & Gerard-Varet, L. -A., 1982. "Bayesian incentive compatible beliefs," Journal of Mathematical Economics, Elsevier, pages 83-103.
    18. Matsushima, Hitoshi, 1988. "A new approach to the implementation problem," Journal of Economic Theory, Elsevier, vol. 45(1), pages 128-144, June.
    19. Leandro Arozamena & Estelle Cantillon, 2004. "Investment Incentives in Procurement Auctions," Review of Economic Studies, Oxford University Press, pages 1-18.
    20. Aviad Heifetz & Zvika Neeman, 2006. "On the Generic (Im)Possibility of Full Surplus Extraction in Mechanism Design," Econometrica, Econometric Society, vol. 74(1), pages 213-233, January.
    21. Green, Jerry & Laffont, Jean-Jacques, 1977. "Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods," Econometrica, Econometric Society, vol. 45(2), pages 427-438, March.
    22. Mailath George J. & Matthews Steven A. & Sekiguchi Tadashi, 2002. "Private Strategies in Finitely Repeated Games with Imperfect Public Monitoring," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-23, June.
    23. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
    24. Piccione, Michele & Tan, Guofu, 1996. "Cost-Reducing Investment, Optimal Procurement and Implementation by Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 663-685, August.
    25. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    26. Myerson, Roger B, 1986. "Multistage Games with Communication," Econometrica, Econometric Society, vol. 54(2), pages 323-358, March.
    27. Dirk Bergemann & Juuso Valimaki, 2002. "Information Acquisition and Efficient Mechanism Design," Econometrica, Econometric Society, vol. 70(3), pages 1007-1033, May.
    28. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
    29. Aoyagi, Masaki, 1998. "Correlated Types and Bayesian Incentive Compatible Mechanisms with Budget Balance," Journal of Economic Theory, Elsevier, vol. 79(1), pages 142-151, March.
    30. Partha Dasgupta & Peter Hammond & Eric Maskin, 1979. "The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 185-216.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kohler, Stefan, 2011. "Altruism and fairness in experimental decisions," Journal of Economic Behavior & Organization, Elsevier, pages 101-109.
    2. Gottardi, Piero & Tallon, Jean Marc & Ghirardato, Paolo, 2017. "Flexible contracts," Games and Economic Behavior, Elsevier, pages 145-167.
    3. Ben-Ner, Avner & Kong, Fanmin & Lluis, Stéphanie, 2012. "Uncertainty, task environment, and organization design: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 281-313.
    4. Jed DeVaro & Antti Kauhanen, 2016. "An “Opposing Responses” Test of Classic versus Market-Based Promotion Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 747-779.
    5. Piero Gottardi & Jean-Marc Tallon & Paolo Ghirardato, 2015. "Flexible contracts," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01238046, HAL.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:8:y:2008:i:1:n:10. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla). General contact details of provider: https://www.degruyter.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.