Asymmetric Awareness and Moral Hazard
AbstractThis 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.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2012/23.
Date of creation: 2012
Date of revision:
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More information through EDIRC
Unawareness; Moral Hazard; Incomplete Contracts;
Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
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