Principal and Expert Agent.

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...

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Main Author: Malcomson, J
Format: Journal article
Language:English
Published: Berkley Electronic Press 2009
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author Malcomson, J
author_facet Malcomson, J
author_sort Malcomson, J
collection OXFORD
description 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.
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spelling oxford-uuid:2a2060a5-9fb5-40d5-8ba3-53937e9fa60f2022-03-26T12:23:10ZPrincipal and Expert Agent.Journal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:2a2060a5-9fb5-40d5-8ba3-53937e9fa60fEnglishDepartment of Economics - ePrintsBerkley Electronic Press2009Malcomson, JThis 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.
spellingShingle Malcomson, J
Principal and Expert Agent.
title Principal and Expert Agent.
title_full Principal and Expert Agent.
title_fullStr Principal and Expert Agent.
title_full_unstemmed Principal and Expert Agent.
title_short Principal and Expert Agent.
title_sort principal and expert agent
work_keys_str_mv AT malcomsonj principalandexpertagent