Risk Taking as Self Discipline in Contractual Relationships

Posted: 4 Dec 2009

See all articles by Dongsoo Shin

Dongsoo Shin

Santa Clara University - Leavey School of Business

S. Andrew Starbird

Santa Clara University - Department of Information Systems & Analytics

Date Written: December 2, 2009

Abstract

This paper considers an agency model in which the principal is privately informed of her production technology. In our model, the principal can require the agent to adopt the principal’s technology for production, or alternatively, to adopt a technology in the market. Information about the market technology’s efficiency is publicly available, and thus can be acquired. We show that, if the variation in technological efficiency is large, the principal prefers to delay acquisition of information about the market technology. The reason is that, the principal uses uncertainty as a device to provide a truth-telling incentive to herself, which, in turn, lowers the cost of inducing the agent to accept the contract.

Keywords: Informed Principal, Self discipline, Uncertainty

JEL Classification: D81, D82, D86, L22, L23

Suggested Citation

Shin, Dongsoo and Starbird, Sterling Andrew, Risk Taking as Self Discipline in Contractual Relationships (December 2, 2009). International Journal of the Economics of Business, Vol. 16, No. 3, 2009, Available at SSRN: https://ssrn.com/abstract=1517480

Dongsoo Shin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Sterling Andrew Starbird

Santa Clara University - Department of Information Systems & Analytics ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

HOME PAGE: http://omis.scu.edu/

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