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Asymmetric Awareness and Moral Hazard

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  • Sarah Auster

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 agent’s awareness strategically when proposing the contract. He faces a trade off between participation and incentives. Leaving the agent unaware allows him to exploit the agent’s incomplete understanding of the world. Making the agent aware enables the principal to use the revealed contingencies as signals about the agent’s action choice. The optimal contract reveals contingencies that have low probability but are highly informative about the agent’s effort.

Suggested Citation

  • Sarah Auster, 2011. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2011/, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2011/31
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    References listed on IDEAS

    as
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