Too Good to Be True? Retention Rules for Noisy Agents
American Economic Journal: Microeconomics
vol. 15,
no. 2, May 2023
(pp. 493-535)
Abstract
An agent who privately knows his type seeks to be retained by a principal. Agents signal their type with some ambient noise, but can alter this noise, perhaps at some cost. Our main finding is that in equilibrium, the principal treats extreme signals in either direction with suspicion, and retains the agent if and only if the signal falls in some intermediate bounded set. In short, she follows the maxim: "if it seems too good to be true, it probably is." We consider extensions and applications, including non-normal signal structures, dynamics with term limits, risky portfolio management, and political risk-taking.Citation
Espinosa, Francisco ⓡ Debraj Ray. 2023. "Too Good to Be True? Retention Rules for Noisy Agents." American Economic Journal: Microeconomics, 15 (2): 493-535. DOI: 10.1257/mic.20200472Additional Materials
JEL Classification
- D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- D82 Asymmetric and Private Information; Mechanism Design
- G11 Portfolio Choice; Investment Decisions
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
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