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Principal and Expert Agent

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  • James Malcomson

Abstract

This paper analyses principal-agent contracts when the agent`s action generates information not directly verifiable but used by the agent to make a risky decision. It considers a more general formulation than those studied previously, focusing on the impact on the decision made and the contract between principal and agent. It establishes a precise sense in which distorting decisions reduces the risk borne by a risk-averse agent and conditions under which implementing an optimal decision rule imposes no substantive restrictions on the contract. The paper also uses an application to bidding to supply a good or service to illustrate those results and derive additional ones. A risk-neutral agent with limited liability may optimally choose lower, less risky bids or higher, more risky bids, according to which relaxes the limited liability constraint. There are also natural conditions under which optimal contracts are monotone, possibly with flat sections, like stock option rewards.

Suggested Citation

  • James Malcomson, 2004. "Principal and Expert Agent," Economics Series Working Papers 193, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:193
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper193.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Iossa, Elisabetta & Martimort, David, 2015. "Pessimistic information gathering," Games and Economic Behavior, Elsevier, vol. 91(C), pages 75-96.
    2. Shin, Dongsoo, 2008. "Information acquisition and optimal project management," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 1032-1043, July.
    3. Hilmer, Michael, 2014. "Too many to fail - How bonus taxation prevents gambling for bailouts," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100552, Verein für Socialpolitik / German Economic Association.
    4. Dilek Bülbül & Felix Noth & Marcel Tyrell, 2014. "Why Do Banks Provide Leasing?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(2), pages 137-175, October.
    5. Florian Heider & Roman Inderst, 2012. "Loan Prospecting," Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2381-2415.
    6. Roman Inderst & Sebastian Pfeil, 2013. "Securitization and Compensation in Financial Institutions," Review of Finance, European Finance Association, vol. 17(4), pages 1323-1364.
    7. Szalay, Dezsö, 2009. "Contracts with endogenous information," Games and Economic Behavior, Elsevier, vol. 65(2), pages 586-625, March.
    8. Michael Raith, 2008. "Specific knowledge and performance measurement," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1059-1079.
    9. repec:dau:papers:123456789/5963 is not listed on IDEAS
    10. Iossa, Elisabetta & Martimort, David, 2015. "Pessimistic information gathering," Games and Economic Behavior, Elsevier, vol. 91(C), pages 75-96.
    11. Engert, Andreas & Goldlücke, Susanne, 2013. "Why agents need discretion: The business judgment rule as optimal standard of care," Working Papers 13-04, University of Mannheim, Department of Economics.
    12. Marcoul, Philippe, 2003. "A Theory of Advice Based on Information Search Incentives," Staff General Research Papers Archive 10357, Iowa State University, Department of Economics.
    13. Andres Zambrano, 2015. "Motivating Informed Decisions," DOCUMENTOS CEDE 012576, UNIVERSIDAD DE LOS ANDES-CEDE.

    More about this item

    Keywords

    Principal-Agent Contracts; Project Selection; Optimal Bidding; Portfolio Selection; Limited Liability; Risk Aversion; Asymmetric Information.;

    JEL classification:

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

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