IDEAS home Printed from https://ideas.repec.org/p/gre/wpaper/2012-06.html
   My bibliography  Save this paper

Ambiguity, Agency Relationships and Adverse Selection

Author

Listed:
  • Gérard Mondello

Abstract

This paper applies recent results and advances in the field of ambiguity theory to adverse selection in a delegation process. Our results are the following ones: i) a relevant second-best contract induces no production distortion considering the efficient agent. This alike to the standard case. But the principal will pay him an higher information rent compared the standard case; ii) This is due to the level of transfer paid to the inefficient agent which is higher than under the complete information system (i.e. the first best…); The above results are reached when the agent has neither fully optimistic nor optimistic beliefs. When, he feels an extreme feeling then, the information rent and second best transfers are inside bounds similar to the SEU case; iv) as a consequence, the principal has to adopt a flexible behavior consisting in acquiring new information for becoming either entirely optimistic or pessimistic to minimize transfers and information rent in the proposed delegation contract.

Suggested Citation

  • Gérard Mondello, 2012. "Ambiguity, Agency Relationships and Adverse Selection," GREDEG Working Papers 2012-06, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2012-06
    as

    Download full text from publisher

    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2012-06.pdf
    File Function: First version, 2012
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jürgen Eichberger & David Kelsey & Burkhard C. Schipper, 2009. "Ambiguity and social interaction," Oxford Economic Papers, Oxford University Press, vol. 61(2), pages 355-379, April.
    2. Chateauneuf, Alain & Eichberger, Jurgen & Grant, Simon, 2007. "Choice under uncertainty with the best and worst in mind: Neo-additive capacities," Journal of Economic Theory, Elsevier, vol. 137(1), pages 538-567, November.
    3. Charles J. Cicchetti & A. Myrick Freeman III, 1971. "Option Demand and Consumer Surplus: Further Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 85(3), pages 528-539.
    4. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July.
    5. Fisher, Anthony C. & Krutilla, John V., 1974. "Valuing long run ecological consequences and irreversibilities," Journal of Environmental Economics and Management, Elsevier, vol. 1(2), pages 96-108, August.
    6. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-1280, November.
    7. Camerer, Colin & Weber, Martin, 1992. "Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-370, October.
    8. A. Myrick Freeman III, 1985. "Supply Uncertainty, Option Price, and Option Value," Land Economics, University of Wisconsin Press, vol. 62(2), pages 176-181.
    9. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, pages 566-578.
    10. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    11. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
    12. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    13. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    14. Fisher, Anthony C & Peterson, Frederick M, 1976. "The Environment in Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 14(1), pages 1-33, March.
    15. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
    16. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
    17. Schmalensee, Richard, 1972. "Option Demand and Consumer's Surplus: Valuing Price Changes under Uncertainty," American Economic Review, American Economic Association, vol. 62(5), pages 813-824, December.
    18. Johansson,Per-Olov, 1987. "The Economic Theory and Measurement of Environmental Benefits," Cambridge Books, Cambridge University Press, number 9780521348102, March.
    19. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giraud, Raphaël & Thomas, Lionel, 2017. "Ambiguity, optimism, and pessimism in adverse selection models," Journal of Economic Theory, Elsevier, vol. 171(C), pages 64-100.

    More about this item

    Keywords

    Asymmetric information; agency theory; adverse selection; uncertainty; ambiguity theory; irreversibility; information arrival;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gre:wpaper:2012-06. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patrice Bougette). General contact details of provider: http://edirc.repec.org/data/credcfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.