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A Simple Impossibility Result in Behavioral Contract Theory

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Abstract

The 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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  • Annamaria Menichini & Giovanni Immordino & Maria Grazia Romano, 2010. "A Simple Impossibility Result in Behavioral Contract Theory," CSEF Working Papers 262, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:262
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    1. Giovanni Immordino & Anna Maria C. Menichini & Maria Grazia Romano, 2012. "Optimal Compensation Contracts for Optimistic Managers," Working Papers 3_224, Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Salerno.
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    6. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-684, September.
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    Cited by:

    1. Luc Bridet & Peter Schwardmann, 2020. "Selling Dreams: Endogenous Optimism in Lending Markets," CESifo Working Paper Series 8271, CESifo.

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    More about this item

    Keywords

    Hidden action; anticipatory utility.;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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