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Risky Allocations from a Risk-Neutral Informed Principal

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  • Michela Cella

Abstract

We study a model of informed principal with private values where the principal is risk neutral and the agent is risk averse. We show that the principal, regardless of her type, gains by not revealing her type to the agent through the contract offer. The equilibrium allocation transfers some ex-ante risk from one type of agent to the other. Despite the increase in the principal`s surplus, allocative efficiency does not necessarily improve.

Suggested Citation

  • Michela Cella, 2005. "Risky Allocations from a Risk-Neutral Informed Principal," Economics Series Working Papers 234, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:234
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper234.pdf
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    References listed on IDEAS

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    1. Cella, Michela, 2008. "Informed principal with correlation," Games and Economic Behavior, Elsevier, vol. 64(2), pages 433-456, November.
    2. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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    Cited by:

    1. Cho, Wonjoo & Blandford, David, 2015. "Bilateral information asymmetry and irreversible practice adoption through agri-environmental policy: an application to peat land retirement in Norway," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204212, Agricultural Economics Society.

    More about this item

    Keywords

    Contract; Adverse Selection; Informed Principal; Risk Aversion;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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