Why Does it Matter that Beliefs and Valuations be Correctly Represented?

S. Grant, E. Karni

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Abstract

This paper contains an analysis of a simple principal-agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent's beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal indices the agent to choose an action that is not in the principal's best interest.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages14
Volume2002-12
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-12

Keywords

  • principal agent theory
  • moral hazard

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