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Asymmetric awareness and moral hazard

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  • Auster, Sarah

Abstract

This paper introduces asymmetric awareness into the classical principal–agent model and discusses the optimal contract between a fully aware principal and an unaware agent. The principal enlarges the agentʼs awareness strategically when proposing a contract and faces a tradeoff between participation and incentives. Leaving the agent unaware allows the principal to exploit the agentʼs incomplete understanding of the world, relaxing the participation constraint, while making the agent aware enables the principal to use the revealed contingencies as signals about the agentʼs action choice, relaxing the incentive constraint. The optimal contract reveals contingencies that have low probability but are highly informative about the agentʼs effort.

Suggested Citation

  • Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    • Handle: RePEc:eee:gamebe:v:82:y:2013:i:c:p:503-521
    DOI: 10.1016/j.geb.2013.08.011
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    References listed on IDEAS

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    More about this item

    Keywords

    Unawareness; Moral hazard; Incomplete contracts;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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