7 research outputs found

    Relevance and Symmetry

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    We de…ne a behavioral concept of relevance in the context of decision making under uncertainty. We argue that this concept provides a sensible answer to the question “What probabilistic environments do an individual’s preferences reveal as mattering to her decisions? ” under a symmetry assumption. This question has important implications for economic modeling. It is often the case that a modeler desires to restrict the probabilistic environments a decision maker considers. Without a concept of relevant beliefs, it is impossible to check from preferences whether a model is re-‡ecting what the modeler intended. This checking is essential to isolating the e¤ect of changing information while holding tastes …xed. We show that a single concept of relevance delivers this for a wide range of models, including models that allow for ambiguity attitude. We also use symmetry and relevance to provide insight into the foundations of the-MEU and smooth ambiguity models of decision-making under uncertainty

    Trust in Agency

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    Abstract Existing models of the principal-agent relationship assume the agent works only under extrinsic incentives. However, many observed agency contracts take the form of a¯xed payment. For such contracts to succeed, the principal must trust the agent to work in the absence of incentives. I show that agency fosters the advent of intrinsic motivation and trustworthy behavior. Three distinct motivational schemes are analyzed: norms, ethical standards, and altruism. I identify the conditions under which these mechanisms arise, and show how they promote trust. The analysis alters several important predictions of conventional models: total surplus is shared between principal and agent, the¯rst best outcome ensues in highly uncertain environments, the principal is better o® the more the agent is risk averse, and larger equilibrium extrinsic incentives need not be associated with larger e®ort or larger total surplus. ¤ I thank Daniel Spulber for his advice and encouragement throughout the project as well as Sandee

    Empirical Asset Pricing: Eugene Fama, Lars Peter Hansen, and Robert Shiller

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