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Optimal Forecasting Incentives

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  • Osband, Kent

Abstract

An agent of unknown expertise is requested to forecast the mean of an uncertain outcome. The agent can refine forecasts at a constant marginal cost per unit precision, but neither cost nor precision can be verified by the planner. The problem is to induce both truthful revelation and an appropriate degree of learning so as to minimize the expected sum of direct planning losses and agent payments. Optimal contracts are derived with and without self-screening of expertise and with and without competition between agents. Self-screening tends to be much less valuable than competition. Copyright 1989 by University of Chicago Press.

Suggested Citation

  • Osband, Kent, 1989. "Optimal Forecasting Incentives," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1091-1112, October.
  • Handle: RePEc:ucp:jpolec:v:97:y:1989:i:5:p:1091-1112
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    Cited by:

    1. Malcomson James M, 2009. "Principal and Expert Agent," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-36, May.
    2. Azar, Pablo D. & Micali, Silvio, 0. "Computational principal agent problems," Theoretical Economics, Econometric Society.
    3. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.
    4. Casillas-Olvera, Gabriel & Bessler, David A., 2006. "Probability forecasting and central bank accountability," Journal of Policy Modeling, Elsevier, vol. 28(2), pages 223-234, February.
    5. Wolfgang R. Köhler, 2004. "Optimal Incentive Contracts for Experts," Bonn Econ Discussion Papers bgse6_2004, University of Bonn, Germany.
    6. Armantier, Olivier & Treich, Nicolas, 2013. "Eliciting beliefs: Proper scoring rules, incentives, stakes and hedging," European Economic Review, Elsevier, vol. 62(C), pages 17-40.
    7. Anke Kessler, 2005. "Representative versus direct democracy: The role of informational asymmetries," Public Choice, Springer, vol. 122(1), pages 9-38, January.
    8. Kargin, Vladislav, 2003. "Prevention of herding by experts," Economics Letters, Elsevier, vol. 78(3), pages 401-407, March.
    9. Chen, Clara Xiaoling & Rennekamp, Kristina M. & Zhou, Flora H., 2015. "The effects of forecast type and performance-based incentives on the quality of management forecasts," Accounting, Organizations and Society, Elsevier, vol. 46(C), pages 8-18.
    10. Gromb, Denis & Martimort, David, 2007. "Collusion and the organization of delegated expertise," Journal of Economic Theory, Elsevier, vol. 137(1), pages 271-299, November.
    11. OZERTURK, Saltuk, 2005. "Stock recommendation of an analyst who trades on own account," CORE Discussion Papers 2005089, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Lambert, Nicolas S. & Langford, John & Wortman Vaughan, Jennifer & Chen, Yiling & Reeves, Daniel M. & Shoham, Yoav & Pennock, David M., 2015. "An axiomatic characterization of wagering mechanisms," Journal of Economic Theory, Elsevier, vol. 156(C), pages 389-416.
    13. Marcoul, Philippe, 2003. "A Theory of Advice Based on Information Search Incentives," Staff General Research Papers Archive 10357, Iowa State University, Department of Economics.
    14. Jun, Jooyong & Yoon, Kyoung-Soo, 2012. "Reservation wage and optimal contract for experts," Economics Letters, Elsevier, vol. 117(3), pages 619-623.

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