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Asymmetric awareness and moral hazard

Sarah Auster

Games and Economic Behavior, 2013, vol. 82, issue C, 503-521

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 agentʼs awareness strategically when proposing a contract and faces a tradeoff between participation and incentives. Leaving the agent unaware allows the principal to exploit the agentʼs incomplete understanding of the world, relaxing the participation constraint, while making the agent aware enables the principal to use the revealed contingencies as signals about the agentʼs action choice, relaxing the incentive constraint. The optimal contract reveals contingencies that have low probability but are highly informative about the agentʼs effort.

Keywords: Unawareness; Moral hazard; Incomplete contracts (search for similar items in EconPapers)
JEL-codes: D01 D83 D86 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:82:y:2013:i:c:p:503-521

DOI: 10.1016/j.geb.2013.08.011

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