The University of Southampton
University of Southampton Institutional Repository

The principal-agent problem with smooth ambiguity

The principal-agent problem with smooth ambiguity
The principal-agent problem with smooth ambiguity
We study a principal-agent model in which the (effort-dependent) realisation of output levels is ambiguous, and the agent is ambiguity averse (while the principal is ambiguity neutral). We show that introducing ambiguity aversion will lower profits if the action that the principal wants to implement is the most ambiguous one, while they may increase otherwise. Regarding the design of the optimal contract, we show that under ambiguity aversion the optimal incentive scheme may not be monotone even if a natural generalization of the monotone likelihood ratio property is satisfied, and illustrate how this fact could affect the design of contracts in an applied economic context. We also find that the individual rationality constraint need not bind in the presence of ambiguity aversion unless preferences satisfy constant absolute ambiguity aversion.
1434-4742
1-25
Kellner, Christian
4e2ed069-76c7-4084-a353-f56ee03e2094
Kellner, Christian
4e2ed069-76c7-4084-a353-f56ee03e2094

Kellner, Christian (2017) The principal-agent problem with smooth ambiguity. Review of Economic Design, 21 (2), 1-25. (doi:10.1007/s10058-017-0198-4).

Record type: Article

Abstract

We study a principal-agent model in which the (effort-dependent) realisation of output levels is ambiguous, and the agent is ambiguity averse (while the principal is ambiguity neutral). We show that introducing ambiguity aversion will lower profits if the action that the principal wants to implement is the most ambiguous one, while they may increase otherwise. Regarding the design of the optimal contract, we show that under ambiguity aversion the optimal incentive scheme may not be monotone even if a natural generalization of the monotone likelihood ratio property is satisfied, and illustrate how this fact could affect the design of contracts in an applied economic context. We also find that the individual rationality constraint need not bind in the presence of ambiguity aversion unless preferences satisfy constant absolute ambiguity aversion.

Text
ambipa soton.pdf - Accepted Manuscript
Download (537kB)

More information

Accepted/In Press date: 30 January 2017
e-pub ahead of print date: 11 February 2017
Published date: June 2017
Organisations: Economics

Identifiers

Local EPrints ID: 405629
URI: http://eprints.soton.ac.uk/id/eprint/405629
ISSN: 1434-4742
PURE UUID: 9c162d3e-6e77-43c1-8010-740dfa4aae84
ORCID for Christian Kellner: ORCID iD orcid.org/0000-0003-3855-5418

Catalogue record

Date deposited: 09 Feb 2017 16:42
Last modified: 16 Mar 2024 04:24

Export record

Altmetrics

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of http://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×