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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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    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.
    2. Roland Bénabou & Jean Tirole, 2011. "Identity, Morals, and Taboos: Beliefs as Assets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 805-855.
    3. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-319, June.
    4. 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.
    5. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 55-79.
    6. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-684, September.
    7. Kuznitz, Arik & Kandel, Shmuel & Fos, Vyacheslav, 2008. "A portfolio choice model with utility from anticipation of future consumption and stock market mean reversion," European Economic Review, Elsevier, vol. 52(8), pages 1338-1352, November.
    8. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    9. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 489-520.
    10. Andrew Caplin & John Leahy, 2004. "The supply of information by a concerned expert," Economic Journal, Royal Economic Society, vol. 114(497), pages 487-505, July.
    11. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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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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