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Moral Hazard and Ambiguity

  • Philipp Weinschenk

    ()

    (Max Planck Institute for Research on Collective Goods)

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    We consider a principal-agent model with moral hazard where the agent’s knowledge about the performance measure is ambiguous and he is averse towards ambiguity. We show that the principal may optimally provide no incentives or contract only on a subset of all informative performance measures. That is, the Informativeness Principle does not hold in our model. These results stand in stark contrast to the ones of the orthodox theory, but are empirically of high relevance.

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    File URL: http://www.coll.mpg.de/pdf_dat/2010_39online.pdf
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    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2010_39.

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    Date of creation: Sep 2010
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    Handle: RePEc:mpg:wpaper:2010_39
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    1. Sujoy Mukerji, 2002. "Ambiguity Aversion and Cost-Plus Procurement Contracts," Economics Series Working Papers 112, University of Oxford, Department of Economics.
    2. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
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    5. Itzhak Gilboa & Andrew W. Postlewaite & David Schmeidler, 2008. "Probability and Uncertainty in Economic Modeling," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 173-88, Summer.
    6. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    7. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
    8. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Hanming Fang & Giuseppe Moscarini, 2003. "Morale Hazard," Cowles Foundation Discussion Papers 1422, Cowles Foundation for Research in Economics, Yale University.
    10. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
    11. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
    12. Stefano Della Vigna & Ulrike Malmendier, 2004. "Contract Design and Self-control: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 353-402, May.
    13. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
    14. Luís Santos-Pinto, 2008. "Positive Self-image and Incentives in Organisations," Economic Journal, Royal Economic Society, vol. 118(531), pages 1315-1332, 08.
    15. Karni, Edi, 2009. "A reformulation of the maxmin expected utility model with application to agency theory," Journal of Mathematical Economics, Elsevier, vol. 45(1-2), pages 97-112, January.
    16. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    17. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
    18. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    19. Theo Offerman & Joep Sonnemans & Gijs Van De Kuilen & Peter P. Wakker, 2009. "A Truth Serum for Non-Bayesians: Correcting Proper Scoring Rules for Risk Attitudes ," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1461-1489.
    20. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
    21. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
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