WHY DOES IT MATTER THAT BELIEFS AND VALUATIONS BE CORRECTLY REPRESENTED?†

  1. Simon Grant,
  2. Edi Karni‡

Article first published online: 5 JUL 2005

DOI: 10.1111/j.1468-2354.2005.00351.x

Issue

International Economic Review

International Economic Review

Volume 46, Issue 3, pages 917–934, August 2005

Additional Information

How to Cite

Grant, S. and Karni, E. (2005), WHY DOES IT MATTER THAT BELIEFS AND VALUATIONS BE CORRECTLY REPRESENTED?. International Economic Review, 46: 917–934. doi: 10.1111/j.1468-2354.2005.00351.x

Author Information

  1. Rice University, U.S.A.; Johns Hopkins University, U.S.A.

Publication History

  1. Issue published online: 5 JUL 2005
  2. Article first published online: 5 JUL 2005

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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.

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