INFORMATION,RISK SHARING,AND INCENTIVES IN AGENCY PROBLEMS |
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| Authors: | Jia Xie |
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| Institution: | Bank of Canada, CanadaThe analysis and conclusions set forth are those of the author and do not indicate concurrence by the Bank of Canada. I am especially indebted to Frank Page and Michael Rauh for advice and encouragement, and I am grateful to the editor and two referees for insightful comments that greatly improve the article. For comments and discussions, I thank Eric Rasmusen, Michael Baye, Lars Stole, James Walker, Jason Allen, Hanna Halaburda, and Brian Peterson as well as seminar and conference participants at Indiana University, Washington University in St. Louis, University of Texas at Dallas, and the Midwest Economics Association. Needless to say, any mistakes are mine. |
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| Abstract: | This article studies the use of information for incentives and risk sharing in agency problems. When the principal is risk neutral or the outcome is contractible, risk sharing is unnecessary or dealt with by a contract on the outcome, so information systems are used for incentives only. When the outcome is noncontractible, a risk‐averse principal relies on imperfect information for both incentives and risk sharing. Under the first‐order approach, this article relaxes Gjesdal's criterion for ranking information systems and finds conditions justifying the first‐order approach when the principal is risk averse and the outcome is noncontractible. |
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