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The Economics of Clear Advice and Extreme Options

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  • Dezsö SZALAY

Abstract

This paper is about freedom of choice and rigidity of choice rules as incentive devices. We study the optimal design of an agent's freedom of choice when his information is endogenous and costly to acquire. We show that curtailing the agent's authority over decision-making may be optimal even if the agent's and the principal's ex post objectives coincide. The agent is forced to depart from prior optimal choices and to take a clear stance on a matter. Having the agent choose from extreme options is derived as a second best optimal contract when his information acquisition technology is "success enhancing" and use of contingent monetary compensation infeasible.

Suggested Citation

  • Dezsö SZALAY, 2003. "The Economics of Clear Advice and Extreme Options," Cahiers de Recherches Economiques du Département d'économie 03.09, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:03.09
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    Keywords

    discretion; freedom of action; endogenous information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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