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Simple incentives and diverse beliefs

Author

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  • Rosenthal, Maxwell

    (School of Economics, Georgia Institute of Technology)

Abstract

This paper studies a moral hazard problem in which the principal does not know the agent’s beliefs about the output generating process. The agent is risk neutral, transfers are subject to limited liability, and the principal evaluates contracts according to their worst-case payoff against a rich set of plausible agent beliefs. With common knowledge of the relationship between effort and expected output, optimal contracts are of the form w(y) = max (αy +β, 0). With or without common knowledge of that relationship, there are broad conditions under which optimal contracts are of the form w(y) = αy + β and the principal can not improve her payoff guarantee by randomizing over menus of contracts.

Suggested Citation

  • Rosenthal, Maxwell, 0. "Simple incentives and diverse beliefs," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:5600
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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