Knightian uncertainty and moral hazard
AbstractThis paper presents a principal-agent model in which the agent has imprecise beliefs. We model this situation formally by assuming the agent[modifier letter apostrophe]s preferences are incomplete as in Bewley (1986) . In this setting, incentives must be robust to Knightian uncertainty. We study the implications of robustness for the form of the resulting optimal contracts. We give conditions under which there is a unique optimal contract, and show that it must have a simple flat payment plus bonus structure. That is, output levels are divided into two sets, and the optimal contract pays the same wage for all output levels in each set. We derive this result for the case in which the agent[modifier letter apostrophe]s utility function is linear and then show it also holds if this utility function has some limited curvature.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 146 (2011)
Issue (Month): 3 (May)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622869
Knightian uncertainty Moral hazard Contract theory Incomplete preferences;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Corbae, Dean & Marimon, Ramon, 2011. "Introduction to Incompleteness and Uncertainty in Economics," Journal of Economic Theory, Elsevier, vol. 146(3), pages 775-784, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.