Why Does It Matter That Beliefs and Valuations Be Correctly Represented?
This paper contains an analysis of a simple principal-agent problem illustrating possible problems that arise when the principal 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.
|Date of creation:||Jul 2003|
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- Edi Karni & Philippe Mongin, 2000.
"On the Determination of Subjective Probability by Choices,"
INFORMS, vol. 46(2), pages 233-248, February.
- E. Karni & Ph. Mongin, 1997. "On the determination of subjective probability by choices," THEMA Working Papers 97-37, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- 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, 2003. "On the Representation of Beliefs by Probabilities," Journal of Risk and Uncertainty, Springer, vol. 26(1), pages 17-38, January.
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- Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(1), pages 83-92.
- Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
- Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
- Bengt Holmstrom, 1979.
"Moral Hazard and Observability,"
Bell Journal of Economics,
The RAND Corporation, vol. 10(1), pages 74-91, Spring.
- Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
- Colin F. Camerer, 1997. "Progress in Behavioral Game Theory," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 167-188, Fall. Full references (including those not matched with items on IDEAS)
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