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Asymmetric Awareness and Moral Hazard

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  • Sarah Auster

Abstract

This paper introduces asymmetric awareness into the classical principal-agent model and discusses the optimal contract between a fully aware principal and an unaware agent. The principal enlarges the agent's awareness strategically when proposing the contract. He faces a trade-off between participation and incentives. Leaving the agent unaware allows him to exploit the agent's incomplete understanding of the world. Making the agent aware enables the principal to use the revealed contingencies as signals about the agent's action choice. The optimal contract reveals contingencies that have low probability but are highly informative about the agent's effort.

Suggested Citation

  • Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2012/23
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    References listed on IDEAS

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    Cited by:

    1. Ernst-Ludwig Thadden & Xiaojian Zhao, 2014. "Multi-task agency with unawareness," Theory and Decision, Springer, vol. 77(2), pages 197-222, August.

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    More about this item

    Keywords

    Unawareness; Moral Hazard; Incomplete Contracts;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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