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Optimal contracting under adverse selection: The implications of mentalizing
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematics (Div.).ORCID iD: 0000-0001-6191-7769
2015 (English)In: Współczesna Ekonomia, ISSN 1897-9254, Vol. 9, no 2, 215-232 p.Article in journal (Refereed) Published
Abstract [en]

We study a model of adverse selection, hard and soft information, and mentalizing ability—the human capacity to represent others’ intentions, knowledge, and beliefs. By allowing for a continuous range of different information types, as well as for different means of acquiring information, we develop a model that captures how principals differentially obtain information on agents. We show that principals that combine conventional data collection techniques with mentalizing benefit from a synergistic effect that impacts both the amount of information that is accessed and the overall cost of that information. This strategy affects the properties of the optimal contract, which grows closer to the first best. This research provides insights into the implications of mentalizing for agency theory.

Place, publisher, year, edition, pages
2015. Vol. 9, no 2, 215-232 p.
National Category
Computer Science Information Systems, Social aspects
URN: urn:nbn:se:kth:diva-174686DOI: 10.5709/ce.1897-9254.168ScopusID: 2-s2.0-84937439530OAI: diva2:871384

QC 20151113

Available from: 2015-11-13 Created: 2015-10-07 Last updated: 2015-11-13Bibliographically approved

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Lenells, Jonatan
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