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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.

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File URL: http://www.hec.unil.ch/deep/textes/03.09.pdf
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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 03.09.

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Length: 37 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:lau:crdeep:03.09
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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