Working Paper Series
Investment, Rational Inattention, and Delegation
() and Jörgen Weibull
Abstract: 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.
Keywords: Investment; Rational inattention; Signal Extraction; Principal-agent; Information aquisition; Contract; Bonus; Penalty; (follow links to similar papers)
JEL-Codes: D01; D82; D86; G11; G23; G30; (follow links to similar papers)
51 pages, May 22, 2017
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