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Moral Hazard and Ambiguity

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  • Philipp Weinschenk

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    (Max Planck Institute for Research on Collective Goods)

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    Abstract

    We consider a principal-agent model with moral hazard where the agent’s knowledge about the performance measure is ambiguous and he is averse towards ambiguity. We show that the principal may optimally provide no incentives or contract only on a subset of all informative performance measures. That is, the Informativeness Principle does not hold in our model. These results stand in stark contrast to the ones of the orthodox theory, but are empirically of high relevance.

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    Bibliographic Info

    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2010_39.

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    Date of creation: Sep 2010
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    Handle: RePEc:mpg:wpaper:2010_39

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    Keywords: financial crisis; Basel Accord; banking regulation; capital requirements; modelbased approach; systemic risk;

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