Decision Making with Asymmetric Information

Every day individuals make numerous choices. What is important for making the right choice is that individuals have good information about the consequences of the different alternatives. However, investigating the full consequences of the different alternatives is complicated and costly. Consequently, individuals sometimes do not possess all relevant information to take a decision. This thesis discusses models in which an agent decides whether or not to perform a task on behalf of the principal. A key element in the models we consider is incomplete and asymmetric information. Broadly, the thesis can be split up into two parts. The first part of the thesis deals with models in which the principal is better informed than the agent. The agent has to decide whether or not to perform a task, but lacks information about his ability. We analyze how the agent makes a self-assessment of his ability, based on appraisals of others (the principal) and experience. Based on this self-assessment the agent takes a decision. The second part of the thesis deals with models in which the agent is better informed than the principal. On behalf of the principal the agent takes a decision about a project. Sometimes agents do not act in the interest of the principal. We analyze how the principal can use retention contracts to discipline the agent. In the remainder of the Introduction we discuss the two parts of the thesis and we provide an overview of the chapters of this thesis