A reformulation of the maxmin expected utility model with application to agency theory

Abstract Invoking the parameterized distribution formulation of agency theory, the paper develops axiomatic foundations of the principal’s and agent’s choice behaviors that are representable by the maximization of the minimum expected utility over action-dependent sets of priors. In the context of this model, the paper also discusses some implications of ambiguity aversion for the design of optimal incentive schemes.

[1]  Sanford J. Grossman,et al.  AN ANALYSIS OF THE PRINCIPAL-AGENT PROBLEM , 1983 .

[2]  A. Rustichini,et al.  Ambiguity Aversion, Robustness, and the Variational Representation of Preferences , 2006 .

[3]  Peter P. Wakker,et al.  Additive Representations of Preferences , 1989 .

[4]  J. Mirrlees.  The Optimal Structure of Incentives and Authority Within an Organization , 1976 .

[5]  M. Marinacci,et al.  A Smooth Model of Decision Making Under Ambiguity , 2003 .

[6]  Ambiguity Aversion and Cost-Plus Procurement Contracts , 2002 .

[7]  Daniel McFadden,et al.  Essays on economic behavior under uncertainty , 1976 .

[8]  Jacques Dreze,et al.  Les fondements logiques de l'utilité cardinale et de la probabilité subjective , 1961 .

[9]  Edi Karni,et al.  Agency Theory : Choice-Based Behavioral Foundations of the Parametrized Distribution Formulation , 2006 .

[10]  Edi Karni.  Subjective expected utility theory without states of the world , 2006 .

[11]  I. Gilboa,et al.  Maxmin Expected Utility with Non-Unique Prior , 1989 .

[12]  James A. Mirrlees,et al.  Notes on Welfare Economics, Information, and Uncertainty , 2006 .

[13]  Luca Rigotti,et al.  Imprecise Beliefs in a Principal Agent Model , 1998 .

[14]  Bengt Holmstrom,et al.  Moral Hazard and Observability , 1979 .

[15]  Aldo Rustichini,et al.  Moral hazard and conditional preferences , 1999 .

[16]  D. Ellsberg.  Decision, probability, and utility: Risk, ambiguity, and the Savage axioms , 1961 .

[17]  F. J. Anscombe,et al.  A Definition of Subjective Probability , 1963 .

[18]  Edi Karni,et al.  Agency theory: choice-based foundations of the parametrized distribution formulation , 2008 .

[19]  Massimo Marinacci,et al.  Differentiating ambiguity and ambiguity attitude , 2004, J. Econ. Theory.

[20]  J. Drèze,et al.  Decision theory with moral hazard and state-dependent preferences , 1985 .

[21]  J. Drèze.  Essays on economic decisions under uncertainty , 1987 .

[22]  D. Schmeidler.  Subjective Probability and Expected Utility without Additivity , 1989 .