A Simple Impossibility Result in Behavioral Contract Theory
AbstractThe paper analyses, within a moral hazard scenario, a contract between an agent with anticipatory emotions and a principal who responds strategically to those emotions. The agent receives a private signal on the profitability of the task he was hired for. If the signal is informative about the return from effort, the agent would benefit from knowing accurate news. However, if the agent derives utility from the anticipation of his final payoff, the suppression of a bad signal may induce a positive interim emotional effect. We show that it may be impossible to achieve the first-best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 262.
Date of creation: 18 Oct 2010
Date of revision:
Publication status: published in Economic Letters 113 (2011) 307-309
Hidden action; anticipatory utility.;
Other versions of this item:
- Immordino, Giovanni & Menichini, Anna Maria C. & Romano, Maria Grazia, 2011. "A simple impossibility result in behavioral contract theory," Economics Letters, Elsevier, vol. 113(3), pages 307-309.
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-30 (All new papers)
- NEP-CBE-2010-10-30 (Cognitive & Behavioural Economics)
- NEP-CTA-2010-10-30 (Contract Theory & Applications)
- NEP-UPT-2010-10-30 (Utility Models & Prospect Theory)
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