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The Economics of Clear Advice and Extreme Options


  • Dezsö SZALAY


This paper is about freedom of choice and rigidity of choice rules as incentive devices. We study the optimal design of an agent's freedom of choice when his information is endogenous and costly to acquire. We show that curtailing the agent's authority over decision-making may be optimal even if the agent's and the principal's ex post objectives coincide. The agent is forced to depart from prior optimal choices and to take a clear stance on a matter. Having the agent choose from extreme options is derived as a second best optimal contract when his information acquisition technology is "success enhancing" and use of contingent monetary compensation infeasible.

Suggested Citation

  • Dezsö SZALAY, 2003. "The Economics of Clear Advice and Extreme Options," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.09, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:03.09

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    References listed on IDEAS

    1. Zweimuller, Josef & Winter-Ebmer, Rudolf & Falkinger, Josef, 1996. "Retirement of spouses and social security reform," European Economic Review, Elsevier, vol. 40(2), pages 449-472, February.
    2. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
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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.

    More about this item


    discretion; freedom of action; endogenous information;

    JEL classification:

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

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