Investment, rational inattention, and delegation

Arbeitspapier

We analyze investment decisions when information is costly, with and without delegation to an agent. We use a rational-inattention model and compare it with a canonical signal-extraction model. We identify three "investment conditions". In "sour" conditions, no information is acquired and no investment made. In "sweet" conditions, investment is made "blindly", i.e. without acquiring costly information. In intermediate, "normal" conditions, the decision-maker acquires information and conditions the investment decision upon the information obtained. We investigate if the investor can benefit from employing an agent when the agent's effort and information is private. Not even in the case of a risk neutral agent will the principal perfectly align the agent's incentives with her own at the moment of investment (had the principal known the agent's private information). Optimal contracts for risk neutral agents not only reward good investments but also punishes bad investments. Such contracts include three components: a fixed salary, stocks and options.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IFN Working Paper ; No. 1171

Classification and Topics

• Classification: Wirtschaft ; Microeconomic Behavior: Underlying Principles ; Asymmetric and Private Information; Mechanism Design ; Economics of Contract: Theory ; Portfolio Choice; Investment Decisions ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Corporate Finance and Governance: General
• Subject: Investment ; rational inattention ; signal extraction ; principalagent ; information acquisition ; contract ; bonus ; penalty

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lindbeck, Assar ; Weibull, Jörgen
• Event: Veröffentlichung
• (who): Research Institute of Industrial Economics (IFN)
• (where): Stockholm
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/183400
• Last update: 10.03.2025, 11:44 AM CET