Too Good to Be True? Retention Rules for Noisy Agents

Francisco Espinosa, Debraj Ray

    Research output: Contribution to journalArticlepeer-review


    An agent who privately knows his type seeks to be retained by a principal. Agents signal their type with some ambient noise, but can alter this noise, perhaps at some cost. Our main finding is that in equilibrium, the principal treats extreme signals in either direction with suspicion, and retains the agent if and only if the signal falls in some intermediate bounded set. In short, she follows the maxim: “if it seems too good to be true, it probably is.” We consider extensions and applications, including non-normal signal structures, dynamics with term limits, risky portfolio management, and political risk-taking.

    Original languageEnglish (US)
    Pages (from-to)493-535
    Number of pages43
    JournalAmerican Economic Journal: Microeconomics
    Issue number2
    StatePublished - 2023

    ASJC Scopus subject areas

    • General Economics, Econometrics and Finance


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