Optimism, Overconfidence, and Moral Hazard

I revisit the standard moral hazard model, in which an agent’s preference over contracts is rooted in costly effort choice. I characterize the behavioral content of the model in terms of empirically testable axioms and show that the model’s parameters are identified. I propose general behavioral definitions of relative (over)confidence and optimism and characterize these in terms of the parameters of the moral hazard model. My formal results are rooted in a simple but powerful insight: that the moral hazard model is closely related to the well-known variational model of choice under uncertainty.