Common Agency with Rational Expectations: Theory and Application to a Monetary Union

11 Pages Posted: 13 Jul 2003

See all articles by Avinash Dixit

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Henrik Jensen

University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Abstract

We extend the theory of common agency to the situation where the principals' payoffs are affected by their ex ante expectations of the agent's ex post choice. We show how the usual truthful schedules must be modified to account for the rational expectations constraint. We apply the model to a monetary union where member governments influence the policy of the common central bank using incentive contracts. We examine how the outcomes depend on different delegated objectives of the bank, and find that some often-advocated rules create an excessive deflationary bias.

Suggested Citation

Dixit, Avinash K. and Jensen, Henrik, Common Agency with Rational Expectations: Theory and Application to a Monetary Union. Available at SSRN: https://ssrn.com/abstract=423325

Avinash K. Dixit (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
609-258-4000 (Phone)
609-258-6419 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Henrik Jensen

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35 323 043 (Phone)
+45 35 323 000 (Fax)

HOME PAGE: http://hjeconomics.dk

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
863
PlumX Metrics