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"Insurance Reversal" in an Agency Model With Uncertainty


  • Nicola Dimitri


The paper introduces Knightian uncertainty, formalized by non-additive probabilities, within a simple agency model. The framework appears to be suitable to deal with issues like delegation in innovative firms. The paper stresses that, with Knightian uncertainty, if the principal is pessimistic and the agent optimistic, the optimal contract may reverse the findings of the standard agency model with observability. Namely, the principal would fully insure himself across states of nature while the agent's reward will be state-dependent. Hence, enven with observability, uncertainty could 'require' the agent's compensation to operate as an incentive mechanism.

Suggested Citation

  • Nicola Dimitri, 1999. ""Insurance Reversal" in an Agency Model With Uncertainty," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(3), pages 516-516, September.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199909)155:3_516:iriaam_2.0.tx_2-p

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    References listed on IDEAS

    1. Matsushima Hitoshi, 1993. "Bayesian Monotonicity with Side Payments," Journal of Economic Theory, Elsevier, vol. 59(1), pages 107-121, February.
    2. Matsushima, Hitoshi, 2008. "Role of honesty in full implementation," Journal of Economic Theory, Elsevier, vol. 139(1), pages 353-359, March.
    3. Doghmi Ahmed & Ziad Abderrahmane, 2013. "On Partially Honest Nash Implementation in Private Good Economies with Restricted Domains: A Sufficient Condition," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 13(1), pages 1-14, September.
    4. Andreas Diekmann & Wojtek Przepiorka & Heiko Rauhut, 2011. "Lifting the veil of ignorance: An experiment on the contagiousness of norm violations," Discussion Papers 2011004, University of Oxford, Nuffield College.
    5. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    6. Li Hao & Daniel Houser, 2011. "Honest Lies," Working Papers 1021, George Mason University, Interdisciplinary Center for Economic Science.
    7. Jacob Glazer & Ariel Rubinstein, 2014. "Complex Questionnaires," Econometrica, Econometric Society, vol. 82(4), pages 1529-1541, July.
    8. Houser, Daniel & Vetter, Stefan & Winter, Joachim, 2012. "Fairness and cheating," European Economic Review, Elsevier, vol. 56(8), pages 1645-1655.
    9. Geoffroy de Clippel & Rene Saran & Roberto Serrano, 2014. "Mechanism Design with Bounded Depth of Reasoning and Small Modeling Mistakes," Working Papers 2014-7, Brown University, Department of Economics.
    10. Matsushima, Hitoshi, 2008. "Behavioral aspects of implementation theory," Economics Letters, Elsevier, vol. 100(1), pages 161-164, July.
    11. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, March.
    12. Kartik, Navin & Tercieux, Olivier & Holden, Richard, 2014. "Simple mechanisms and preferences for honesty," Games and Economic Behavior, Elsevier, vol. 83(C), pages 284-290.
    13. Lombardi, Michele & Yoshihara, Naoki, 2011. "Partially-honest Nash implementation: Characterization results," CCES Discussion Paper Series 43, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    14. John C. Harsanyi, 1967. "Games with Incomplete Information Played by "Bayesian" Players, I-III Part I. The Basic Model," Management Science, INFORMS, vol. 14(3), pages 159-182, November.
    15. Ville Korpela, 2014. "Bayesian implementation with partially honest individuals," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(3), pages 647-658, October.
    16. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, vol. 88(1), pages 119-160, September.
    17. Sjaak Hurkens & Navin Kartik, 2009. "Would I lie to you? On social preferences and lying aversion," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 180-192, June.
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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