Common agency with Rational Expectations

Theory and Application to a Monetary Union

Bibliographic Data

ID9714709
AuthorsAvinash Dixit (0000-0002-8929-7503, Princeton University), Henrik Jensen (0000-0001-6750-2716, University of Copenhagen, CEPR and EPRU)
Year2003
Volume113
Issue489
Pages539-549
Publication date2003-07-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (OUP) (PUBLISHER)
DOI10.1111/1468-0297.t01-1-00143
OpenAlexW2000172347
LanguageEN
Citations received4
References cited8

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

Agency (philosophy · Central bank · Constraint (computer-aided design · Deflation · Dynamic inconsistency · Economics · Ex-ante · Incentive · Macroeconomics · Microeconomics · Monetary economics · Monetary policy · Participation constraint · Principal–agent problem · Rational expectations · Banking stability, regulation, efficiency · Economic theories and models · Finance · Monetary Policy and Economic Impact