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Risk Taking as Self Discipline in Contractual Relationships

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  • Dongsoo Shin
  • S. Andrew Starbird

Abstract

This paper considers an agency model in which the principal is privately informed of her production technology. In our model, the principal can require the agent to adopt the principal's technology for production, or alternatively, to adopt a technology in the market. Information about the market technology's efficiency is publicly available, and thus can be acquired. We show that, if the variation in technological efficiency is large, the principal prefers to delay acquisition of information about the market technology. The reason is that, the principal uses uncertainty as a device to provide a truth-telling incentive to herself, which, in turn, lowers the cost of inducing the agent to accept the contract.

Suggested Citation

  • Dongsoo Shin & S. Andrew Starbird, 2009. "Risk Taking as Self Discipline in Contractual Relationships," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 16(3), pages 289-304.
    • Handle: RePEc:taf:ijecbs:v:16:y:2009:i:3:p:289-304
    DOI: 10.1080/13571510903227023
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    References listed on IDEAS

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