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Contracts and uncertainty

Author

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  • ,

    (Northwestern University)

  • ,

    (University of Pennsylvania and Northwestern University)

Abstract

A decision maker, named Alice, wants to know if an expert has significant information about payoff-relevant probabilities of future events. The expert, named Bob, either knows this probability almost perfectly or knows nothing about it. Hence, both Alice and the uninformed expert face uncertainty: they do not know the payoff-relevant probability. Alice offers a contract to Bob. If he accepts this contract then he must announce the probability distribution before any data are observed. Once the data unfold, transfers between Alice and Bob occur. It is demonstrated that if the informed expert accepts some contract then the uninformed expert also accepts this contract. Hence, Alice's adverse selection problem cannot be mitigated by screening contracts that separate informed from uninformed experts. This result stands in contrast with the analysis of contracts under risk, where separation is often feasible.

Suggested Citation

  • , & ,, 2007. "Contracts and uncertainty," Theoretical Economics, Econometric Society, vol. 2(1), pages 1-13, March.
    • Handle: RePEc:the:publsh:153
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    Citations

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    Cited by:

    1. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.
    2. Valsecchi, Irene, 2008. "Learning from Experts," International Energy Markets Working Papers 36756, Fondazione Eni Enrico Mattei (FEEM).
    3. Mark Whitmeyer & Kun Zhang, 2023. "Redeeming Falsifiability?," Papers 2303.15723, arXiv.org.
    4. Wojciech Olszewski & Alvaro Sandroni, 2008. "Manipulability of Future-Independent Tests," Econometrica, Econometric Society, vol. 76(6), pages 1437-1466, November.
    5. Francisco Barreras & Álvaro José Riascos Villegas, 2016. "Screening multiple potentially false experts," Monografías 18207, Quantil.
    6. Irene Valsecchi, 2008. "Learning from Experts," Working Papers 2008.35, Fondazione Eni Enrico Mattei.
    7. Al-Najjar, Nabil & Sandroni, Alvaro, 2013. "A difficulty in the testing of strategic experts," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 5-9.
    8. Alvaro Sandroni & Wojciech Olszewski, 2008. "Falsifiability," PIER Working Paper Archive 08-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    9. Francisco Barreras, 2017. "Screening Multiple Uninformed Experts," Documentos de Trabajo 15282, Quantil.

    More about this item

    Keywords

    Contracts; uncertainty; experts; minmax theorems;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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