Information Aggregation via Contracting |
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Authors: | JIASUN LI |
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Institution: | 1. Correspondence: Jiasun Li, School of Business, George Mason University, 4400 University Drive, MSN 1B8, Fairfax, VA 22030, USA;2. e-mail: jli29@gmu.edu |
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Abstract: | When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk-taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting-based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well-known rational expectations equilibrium models. |
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