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A Simple Impossibility Result in Behavioral Contract Theory

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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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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 262.

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Date of creation: 18 Oct 2010
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Publication status: published in Economic Letters 113 (2011) 307-309
Handle: RePEc:sef:csefwp:262

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Keywords: Hidden action; anticipatory utility.;

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