Motivating Informed Decisions

Andres Zambrano

No 12576, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: This paper studies a principal-agent model where a risk-neutral principal delegates to a risk-neutral agent the decision of whether to pursue a risky project or a safe one. The return from the risky project is unknown and the agent can acquire costly unobservable information about it before taking the decision. The problem has features of moral hazard and hidden information since the acquisition of information and its content are unobservable to the principal. The optimal contract suggests that the principal should only reward the agent for outcomes that are significantly better than the safe return. It is also optimal to distort the project choice in favor of the risky one as a mechanism to induce the direct revelation of the uncertain state. In a managerial context, the findings explain why options induce better decision making from CEOs, as well as why excessive risk taking might be optimal.

Keywords: Information Acquisition; Private Information; Contract; CEO compensation (search for similar items in EconPapers)
JEL-codes: D82 D83 D86 M12 (search for similar items in EconPapers)
Pages: 28
Date: 2015-02-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://repositorio.uniandes.edu.co/bitstream/handle/1992/8554/dcede2015-08.pdf

Related works:
Journal Article: Motivating informed decisions (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:012576

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