Department of Economics and Business Economics

Expert Advice, Control, and Heterogeneous Beliefs

Research output: Contribution to book/anthology/report/proceedingArticle in proceedingsResearchpeer-review

  • School of Economics and Management
This paper studies the effects of overconfidence in an investment-decision setting. A risk-averse agent privately observes information relevant to an investment decision, that he can report to a principal. In a standard common-priors setting, the optimal contract provides full insurance to the agent: the principal pays a fixed wage to the agent, asks him to reveal his information, and implements the efficient investment rule. When the agent overestimates the expected revenue of the project following investment, however, he is willing to “wager” on success against the (relatively pessimistic) principal, and hence bear some project risk in equilibrium. In addition, because what the principal considers to be the optimal investment rule is too conservative according to the agent’s beliefs and the agent holds some stake in the choice of investment rule, he will accept a lower fixed payment in exchange for a more liberal investment rule. This can be interpreted as giving more control to the agent. It is somewhat counterintuitive that the principal will surrender more control to an agent with whom she disagrees more sharply.
Original languageEnglish
Title of host publication2007 Oxford Business & Economics Conference
Number of pages20
PublisherAssociation for Business and Economics Research
Publication year2007
ISBN (print)978-0-9742114-7-3
Publication statusPublished - 2007
EventOxford Business & Economics Conference - Oxford, United Kingdom
Duration: 24 Jun 200726 Jun 2007

Conference

ConferenceOxford Business & Economics Conference
LandUnited Kingdom
ByOxford
Periode24/06/200726/06/2007

    Research areas

  • overconfidence, expert advice, heterogeneous beliefs

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