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Investment, Rational Inattention, and Delegation

Assar Lindbeck () and Jörgen Weibull
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Assar Lindbeck: Research Institute of Industrial Economics (IFN), Postal: and IIES, Stockholm University, http://www.ifn.se/eng/people/research-faculty/assarl

No 1171, Working Paper Series from Research Institute of Industrial Economics

Abstract: We analyze investment decisions when information is costly, with and without delegation to an agent. We use a rational-inattention model and compare it with a canonical signal-extraction model. We identify three "investment conditions". In "sour" conditions, no information is acquired and no investment made. In "sweet" conditions, investment is made "blindly", i.e. without acquiring costly information. In intermediate, "normal" conditions, the decision-maker acquires information and conditions the investment decision upon the information obtained. We investigate if the investor can benefit from employing an agent when the agent's effort and information is private. Not even in the case of a risk neutral agent will the principal perfectly align the agent's incentives with her own at the moment of investment (had the principal known the agent's private information). Optimal contracts for risk neutral agents not only reward good investments but also punishes bad investments. Such contracts include three components: a fixed salary, stocks and options.

Keywords: Investment; Rational inattention; Signal Extraction; Principal-agent; Information aquisition; Contract; Bonus; Penalty (search for similar items in EconPapers)
JEL-codes: D01 D82 D86 G11 G23 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-mic and nep-upt
Date: 2017-05-22
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