Abstract
This paper studies the joint determination of optimal contracts and equilibrium asset prices in an economy with multiple principal-agent pairs. Principals design optimal contracts that provide incentives for agents to acquire costly information. With agency problems, the agents’ compensation depends on the accuracy of their forecasts for asset prices and payos. Complementarities in information acquisition delegation arise as follows. As more principals hire agents to acquire information, asset prices become less noisy. Consequently, agents are more willing to acquire information because they can forecast asset prices more accurately, thus mitigating agency problems and encouraging other principals to hire agents. This mechanism can explain many interesting phenomena in markets, including multiple equilibria, herding, home bias and idiosyncratic volatility comovement.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
