Motivating Information Acquisition Under Delegation

59 Pages Posted: 2 Nov 2018

See all articles by Spyros Terovitis

Spyros Terovitis

University of Amsterdam, Finance Group

Date Written: September 26, 2018

Abstract

We study a model in which a principal delegates a choice between different actions to an expert. The return from each action is unknown but the expert can invest in acquiring (noisy) information before making her choice. The principal would like the expert to invest in information but this investment is unobservable and only the chosen action and its resulting payoff is contractible. We solve for the optimal contract and show that it induces a contrarian bias. As the main application, we explore a setting where an analyst in a brokerage house issues financial recommendations, and argue that our findings are supported by empirical evidence on the behavior of financial analysts.

Keywords: Information Acquisition, Compensation, Financial Analysts

JEL Classification: D82, D83, G24

Suggested Citation

Terovitis, Spyros, Motivating Information Acquisition Under Delegation (September 26, 2018). Available at SSRN: https://ssrn.com/abstract=3264177 or http://dx.doi.org/10.2139/ssrn.3264177

Spyros Terovitis (Contact Author)

University of Amsterdam, Finance Group ( email )

M3.04, Amsterdam Business School
Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands

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