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Speculative Contracts

Author Info

Listed author(s):
  • Kfir Eliaz
  • Rani Spiegler

Abstract

We propose to view action-contingent contracts as bets, motivated by different prior beliefs between the contracting parties (rather than, say, as an instrument for overcoming moral hazard problems). Such differences in prior beliefs may arise from inherent biases such as over-optimism. Menus of contingent contracts that arise in principal-agent relationships are thus interpreted as a consequence of the principal's attempt to screen the agent's prior belief. Thus, an employer may offer his worker to choose between fixed-wage and profit-sharing schemes, in order to screen the worker's degree of optimism. We present a model of bilateral contracting which captures these ideas, characterize the optimal menu and apply it to a number of economic settings.

(This abstract was borrowed from another version of this item.)

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File URL: http://www.tau.ac.il/~rani/DCP.pdf
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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 784828000000000628.

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Date of creation: 21 Nov 2005
Handle: RePEc:cla:levrem:784828000000000628
Contact details of provider: Web page: http://www.dklevine.com/

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Find related papers by JEL classification:
  • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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  1. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 689-714.
  2. Armstrong, Mark, 1996. "Nonlinear pricing with imperfectly informed consumers," MPRA Paper 36332, University Library of Munich, Germany.
  3. Krishna, Vijay, 2002. "Auction Theory," Elsevier Monographs, Elsevier, edition 1, number 9780124262973.
  4. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
  5. Pascal Courty & Li Hao, 2000. "Sequential Screening," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 697-717.
  6. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
  7. Fang, Hanming & Moscarini, Giuseppe, 2005. "Morale hazard," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 749-777, May.
  8. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  9. Augustin Landier & David Thesmar, 2009. "Financial Contracting with Optimistic Entrepreneurs," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 117-150, January.
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Cited by:

  1. Kfir Eliaz & Ran Spiegler, 2007. "A Mechanism-Design Approach to Speculative Trade," Econometrica, Econometric Society, vol. 75(3), pages 875-884, 05.
  2. repec:esx:essedp:643 is not listed on IDEAS

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