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Speculative Contracts

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  • Kfir Eliaz
  • Rani Spiegler

Abstract

We propose to view action-contingent contracts as bets, motivated by different prior beliefs between the contracting parties (rather than, say, as an instrument for overcoming moral hazard problems). Such differences in prior beliefs may arise from inherent biases such as over-optimism. Menus of contingent contracts that arise in principal-agent relationships are thus interpreted as a consequence of the principal's attempt to screen the agent's prior belief. Thus, an employer may offer his worker to choose between fixed-wage and profit-sharing schemes, in order to screen the worker's degree of optimism. We present a model of bilateral contracting which captures these ideas, characterize the optimal menu and apply it to a number of economic settings.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 784828000000000628.

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Date of creation: 21 Nov 2005
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Handle: RePEc:cla:levrem:784828000000000628

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  1. Hanming Fang & Giuseppe Moscarini, 2003. "Morale Hazard," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1422, Cowles Foundation for Research in Economics, Yale University.
  2. Armstrong, Mark, 1996. "Nonlinear pricing with imperfectly informed consumers," MPRA Paper 36332, University Library of Munich, Germany.
  3. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 297-310, March.
  4. Augustin Landier & David Thesmar, 2009. "Financial Contracting with Optimistic Entrepreneurs," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(1), pages 117-150, January.
  5. Courty, Pascal & Li, Hao, 2000. "Sequential Screening," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(4), pages 697-717, October.
  6. Kfir Eliaz & Ran Spiegler, 2004. "Contracting with Diversely Naïve Agents," Levine's Bibliography 122247000000000530, UCLA Department of Economics.
  7. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, Elsevier, vol. 1(3), pages 267-302.
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Cited by:
  1. Eliaz, Kfir & Spiegler, Ran, 2005. "A Mechanism-Design Approach to Speculative Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5434, C.E.P.R. Discussion Papers.
  2. Alvaro Sandroni & Francesco Squintani, 2007. "Overconfidence, Insurance, and Paternalism," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 1994-2004, December.

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