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A simple impossibility result in behavioral contract theory

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  • Immordino, Giovanni
  • Menichini, Anna Maria C.
  • Romano, Maria Grazia

Abstract

This paper studies a contract between an optimistic agent and a realistic principal, both risk-neutral. Even with complete contracts and ex-ante symmetric information, it may be impossible to achieve the first-best unless the weight on emotions is sufficiently low.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:ecolet:v:113:y:2011:i:3:p:307-309
    DOI: 10.1016/j.econlet.2011.08.027
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    References listed on IDEAS

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    7. 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.
    8. Caplin, Andrew & Eliaz, Kfir, 2003. "AIDS Policy and Psychology: A Mechanism-Design Approach," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 631-646, Winter.
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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; Impossibility;
    All these keywords.

    JEL classification:

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

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