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Asymmetric Awareness and Moral Hazard

  • Sarah Auster
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    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.

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    Paper provided by European University Institute in its series Economics Working Papers with number ECO2011/.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:eui:euiwps:eco2011/31
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    1. Li, Jing, 2009. "Information structures with unawareness," Journal of Economic Theory, Elsevier, vol. 144(3), pages 977-993, May.
    2. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
    3. Aviad Heifetz & Martin Meier & Burkhard C. Schipper, 2009. "Unawareness, Beliefs and Speculative Trade," Working Papers 920, University of California, Davis, Department of Economics.
    4. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 1998. "Standard State-Space Models Preclude Unawareness," Econometrica, Econometric Society, vol. 66(1), pages 159-174, January.
    5. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
    6. Oliver Board, 2008. "Object-Based Unawareness: Theory and Applications," Working Papers 378, University of Pittsburgh, Department of Economics, revised Mar 2009.
    7. Nabil I. Al-Najjar & Luca Anderlini & Leonardo Felli, 2006. "Undescribable Events," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 849-868.
    8. Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer, vol. 12(2), pages 259-292.
    9. Santos-Pinto, Luís, 2003. "Positive self-image and incentives in organizations," MPRA Paper 3141, University Library of Munich, Germany, revised 14 Feb 2007.
    10. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2006. "Interactive unawareness," Journal of Economic Theory, Elsevier, vol. 130(1), pages 78-94, September.
    11. repec:bla:restud:v:73:y:2006:i:4:p:849-868 is not listed on IDEAS
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