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The Economics of Clear Advice and Extreme Options

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  • Dezsö Szalay

Abstract

I study a principal-agent model in which the agent collects information and then chooses a verifiable action. I show that the principal can find it desirable to constrain the agent's action set even though there is no disagreement about the ranking of actions ex post. The elimination or penalization of "intermediate" actions, which are optimal when information is poor, improves incentives for information collection. I characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral. Copyright 2005, Wiley-Blackwell.

Suggested Citation

  • Dezsö Szalay, 2005. "The Economics of Clear Advice and Extreme Options," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(4), pages 1173-1198.
    • Handle: RePEc:oup:restud:v:72:y:2005:i:4:p:1173-1198
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    File URL: http://hdl.handle.net/10.1111/0034-6527.00366
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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