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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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    Cited by:

    1. repec:kap:theord:v:83:y:2017:i:2:d:10.1007_s11238-017-9594-z is not listed on IDEAS
    2. Haisken-DeNew, John & Hasan, Syed & Jha, Nikhil & Sinning, Mathias, 2018. "Unawareness and selective disclosure: The effect of school quality information on property prices," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 449-464.
    3. Wenjun Ma & Burkhard C. Schipper, 2017. "Does exposure to unawareness affect risk preferences? A preliminary result," Theory and Decision, Springer, vol. 83(2), pages 245-257, August.
    4. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    5. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters,in: Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485 Edward Elgar Publishing.
    6. Antoine Dubus, 2017. "Asymmetric Awareness and Heterogeneous Agents," Working Papers hal-01521487, HAL.
    7. repec:eee:gamebe:v:106:y:2017:i:c:p:134-152 is not listed on IDEAS
    8. Paulo Fagandini, 2018. "Hunting with two bullets: moral hazard with a second chance," FEUNL Working Paper Series wp629, Universidade Nova de Lisboa, Faculdade de Economia.
    9. Karni, Edi & Vierø, Marie-Louise, 2017. "Awareness of unawareness: A theory of decision making in the face of ignorance," Journal of Economic Theory, Elsevier, vol. 168(C), pages 301-328.
    10. Nicola Pavoni & Sarah Auster, 2016. "Optimal Delegation, Unawareness, and Financial Intermediation," 2016 Meeting Papers 1106, Society for Economic Dynamics.
    11. Schumacher, Heiner & Thysen, Heidi, 2017. "Equilibrium Contracts and Boundedly Rational Expectations," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168085, Verein für Socialpolitik / German Economic Association.
    12. Sarah Auster & Nicola Pavoni, 2018. "Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation," BAFFI CAREFIN Working Papers 1869, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    13. Pamela Giustinelli & Nicola Pavoni, 2017. "The Evolution of Awareness and Belief Ambiguity in the Process of High School Track Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 93-120, April.
    14. Pamela Giustinelli & Nicola Pavoni, 2016. "The Evolution of Awareness and Belief Ambiguity During the Process of High School Track Choice," Working Papers 574, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    15. Zhengqing Gui & Yangguang Huang & Xiaojian Zhao, 2018. "Whom to Educate? Financial Fraud and Investor Awareness," HKUST IEMS Working Paper Series 2018-52, HKUST Institute for Emerging Market Studies, revised Jan 2018.
    16. Surajeet Chakravarty & David Kelsey & Joshua C. Teitelbaum, 2018. "Tort Liability and Unawareness," Discussion Papers 1801, University of Exeter, Department of Economics.
    17. Wenjun Ma & Burkhard C. Schipper, 2017. "Does exposure to unawareness affect risk preferences? A preliminary result," Theory and Decision, Springer, vol. 83(2), pages 245-257, August.

    More about this item

    Keywords

    Unawareness; Moral hazard; Incomplete contracts;

    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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