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Risky Allocations from a Risk-Neutral Informed Principal

  • Michela Cella

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.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper234.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 234.

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Date of creation: 01 Apr 2005
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Handle: RePEc:oxf:wpaper:234
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Web page: http://www.economics.ox.ac.uk/
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  1. 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.
  2. Cella, Michela, 2008. "Informed principal with correlation," Games and Economic Behavior, Elsevier, vol. 64(2), pages 433-456, November.
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