It is suggested that individual behavior under ambiguity, or knightian uncertainty, may represent an alternative explanation for contractual incompleteness with respect to the traditional approach in terms of transactions costs. This paper aims at showing that the introduction of ambiguity in the economic analysis of contracts may be very fruitful. In particular, we analyze how ambiguity affects the optimal compensation scheme in a principal-agent framework, where the principal cannot observe the agent’s effort and, contrary to standard assumptions, is ambiguityaverse. Also, our model makes it possible to generalize the Mukerji (1998) approach to contractual incompleteness. In fact, it shows that incomplete contracts are costly and that, before reaching the conclusion that ambiguity leads to contractual incompleteness, their costs should be compared with those of complete contracts, other things being equal.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. 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.
Publisher Info
Paper provided by Sapienza University of Rome, Department of Public Economics in its series Working Papers with number
64.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: