Journal Article

The Economics of Clear Advice and Extreme Options

Dezsö Szalay

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 4, pages 1173-1198
Published in print October 2005 | ISSN: 0034-6527
Published online October 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00366
The Economics of Clear Advice and Extreme Options

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I study a principal-agent model in which the agent collects information and then chooses a verifiable action. I show that the principal can find it desirable to constrain the agent's action set even though there is no disagreement about the ranking of actions ex post. The elimination or penalization of “intermediate” actions, which are optimal when information is poor, improves incentives for information collection. I characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral.

Keywords: D82

Journal Article.  13078 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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