Ambiguity and Disclosure in The Principal-Agent Model

35 Pages Posted: 30 Nov 2017

See all articles by Yehuda (Yud) Izhakian

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Jaime F. Zender

University of Colorado at Boulder - Department of Finance

Date Written: November 16, 2017

Abstract

A Principal-Agent model is examined in which the principal and the agent are ambiguity averse. With a risk neutral principal and a risk averse agent the presence of ambiguity aversion implies that the principal will not always fully insure the agent when effort is observable. Instead, risk may be introduced into the incentive scheme to take advantage of differences in ambiguity aversion. When effort is unobservable, depending on the relative ambiguity aversion of the principal and the agent, ambiguity aversion may increase or decrease the strength of the pay for performance relation relative to the standard model. A superiorly informed principal has an incentive to disclose information to the agent in order to alter the level of ambiguity perceived by the agent. Depending on the agent's risk aversion and on the relative levels of ambiguity aversion, the principal may have an interest in decreasing or increasing the ambiguity the agent perceives.

Keywords: principal-agent, ambiguity, optimism, pessimism, disclosure

JEL Classification: D81, D83, G11, G12, G13

Suggested Citation

Izhakian, Yehuda (Yud) and Zender, Jaime F., Ambiguity and Disclosure in The Principal-Agent Model (November 16, 2017). Available at SSRN: https://ssrn.com/abstract=3066761 or http://dx.doi.org/10.2139/ssrn.3066761

Yehuda (Yud) Izhakian (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

Jaime F. Zender

University of Colorado at Boulder - Department of Finance ( email )

Boulder, CO 80309
United States
303-554-1665 (Phone)
303-492-4689 (Fax)

HOME PAGE: http://www-bus.colorado.edu/faculty/Zender/

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