Type: Working Paper
Asymmetric Awareness and Moral Hazzard
Working Paper, EUI ECO, 2012/23
AUSTER, Sarah, Asymmetric Awareness and Moral Hazzard, EUI ECO, 2012/23 - https://hdl.handle.net/1814/24274
Retrieved from Cadmus, EUI Research Repository
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.
Cadmus permanent link: https://hdl.handle.net/1814/24274
Series/Number: EUI ECO; 2012/23