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WHY DOES IT MATTER THAT BELIEFS AND VALUATIONS BE CORRECTLY REPRESENTED?*
Author(s) -
Grant Simon,
Karni Edi
Publication year - 2005
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2005.00351.x
Subject(s) - principal (computer security) , incentive , simple (philosophy) , action (physics) , principal–agent problem , economics , microeconomics , mathematical economics , computer science , actuarial science , computer security , epistemology , finance , corporate governance , philosophy , physics , quantum mechanics
This article contains an analysis of a simple principal–agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent's beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal induces the agent to choose an action that is not in the principal's best interest.