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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- Karni, E. & Mongin, P., 1997.
"On the Determination of Subjective Probability by Choices,"
9737, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
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- 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.
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- Karni, Edi & Postlewaite, Andrew, 2005. "David Schmeidler," Games and Economic Behavior, Elsevier, vol. 50(1), pages 1-2, January.
- Karni, Edi, 2003. " On the Representation of Beliefs by Probabilities," Journal of Risk and Uncertainty, Springer, vol. 26(1), pages 17-38, January.
- Bengt Holmstrom, 1997.
"Moral Hazard and Observability,"
Levine's Working Paper Archive
1205, David K. Levine.
- Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer, vol. 20(1), pages 83-92.
- Karni, Edi, 1996. "Probabilities and Beliefs," Journal of Risk and Uncertainty, Springer, vol. 13(3), pages 249-62, November.
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