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The Economics of Clear Advice and Extreme Options


  • Dezsö Szalay


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," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 1173-1198.
  • Handle: RePEc:oup:restud:v:72:y:2005:i:4:p:1173-1198

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    References listed on IDEAS

    1. Eso, Peter & Schummer, James, 2004. "Bribing and signaling in second price auctions," Games and Economic Behavior, Elsevier, vol. 47(2), pages 299-324, May.
    2. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
    3. Santiago Sánchez-Pagés & Marc Vorsatz, 2009. "Enjoy the silence: an experiment on truth-telling," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 220-241, June.
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    Cited by:

    1. De Jaegher, Kris, 2010. "Physician incentives: Cure versus prevention," Journal of Health Economics, Elsevier, vol. 29(1), pages 124-136, January.
    2. Malcomson James M, 2009. "Principal and Expert Agent," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-36, May.
    3. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.
    4. Aoyagi, Masaki, 2014. "Strategic obscurity in the forecasting of disasters," Games and Economic Behavior, Elsevier, vol. 87(C), pages 485-496.
    5. Kolotilin, Anton & Li, Hao & Li, Wei, 2013. "Optimal limited authority for principal," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2344-2382.
    6. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," Games and Economic Behavior, Elsevier, vol. 82(C), pages 15-30.
    7. Saglam, Ismail, 2017. "The Effect of Observability on the Noncontractible Investment of a Regulated Firm," MPRA Paper 75963, University Library of Munich, Germany.
    8. Deimen, Inga & Szalay, Dezsö, 2014. "Smooth, strategic communication," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100333, Verein für Socialpolitik / German Economic Association.
    9. Wolfgang R. Köhler, 2004. "Optimal Incentive Contracts for Experts," Bonn Econ Discussion Papers bgse6_2004, University of Bonn, Germany.
    10. Dezsö Szalay & Ramon Arean, 2005. "Communicating with a Team of Experts," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.12, Université de Lausanne, Faculté des HEC, DEEP.
    11. Deimen, Inga & Szalay, Dezso, 2015. "Information, authority, and smooth communication in organizations," CEPR Discussion Papers 10969, C.E.P.R. Discussion Papers.
    12. Iossa, Elisabetta & Martimort, David, 2015. "Pessimistic information gathering," Games and Economic Behavior, Elsevier, vol. 91(C), pages 75-96.
    13. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
    14. Yeon-Koo Che & Navin Kartik, 2009. "Opinions as Incentives," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 815-860, October.
    15. Arve, Malin & Honryo, Takakazu, 2015. "Delegation and Communication," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 524, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    16. Krähmer, Daniel & Kováč, Eugen, 2016. "Optimal sequential delegation," Journal of Economic Theory, Elsevier, vol. 163(C), pages 849-888.
    17. Flavia Roldán, 2013. "The organization of expertise in the presence of communication," Review of Economic Design, Springer;Society for Economic Design, vol. 17(1), pages 63-81, March.
    18. Helmut Bester & Daniel Krähmer, 2008. "Delegation and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 664-682.
    19. Conlin, Michael & Orsini, Joe & Tang, Meng-Chi, 2013. "The effect of an agent’s expertise on National Football League contract structure," Economics Letters, Elsevier, vol. 121(2), pages 275-281.
    20. Semenov, Aggey, 2012. "Delegation to potentially uninformed agent," MPRA Paper 42080, University Library of Munich, Germany.
    21. repec:eee:jeborg:v:137:y:2017:i:c:p:54-71 is not listed on IDEAS
    22. Chade, Hector & Kovrijnykh, Natalia, 2016. "Delegated information acquisition with moral hazard," Journal of Economic Theory, Elsevier, vol. 162(C), pages 55-92.
    23. Mühlbauer, Stefan, 2016. "Foundation owned firms - a delegation approach," Annual Conference 2016 (Augsburg): Demographic Change 145719, Verein für Socialpolitik / German Economic Association.
    24. K. de Jaegher, 2007. "Expert incentives: cure versus prevention," Working Papers 07-08, Utrecht School of Economics.
    25. Boleslavsky, Raphael & Lewis, Tracy R., 2016. "Evolving influence: Mitigating extreme conflicts of interest in advisory relationships," Games and Economic Behavior, Elsevier, vol. 98(C), pages 110-134.

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    JEL classification:

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


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