Why Does It Matter That Beliefs And Valuations Be Correctly Represented?
This article contains an analysis of a simple principal-agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent's beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal induces the agent to choose an action that is not in the principal's best interest. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
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Volume (Year): 46 (2005)
Issue (Month): 3 (08)
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References listed on IDEAS
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- Karni, E. & Mongin, P., 1997. "On the Determination of Subjective Probability by Choices," Papers 9737, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- Karni, Edi, 1996. "Probabilities and Beliefs," Journal of Risk and Uncertainty, Springer, vol. 13(3), pages 249-62, November.
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