 Overconfidence and moral hazard without commitmentLeonidas Enrique de la Rosa and Nikolaj Niebuhr Lambertsen Journal of Mathematical Economics, 2025, vol. 119, issue C Abstract: We examine the implications of overconfidence in a moral hazard setting with limited commitment. Limited commitment is costly because the principal will always renegotiate to the optimal risk-sharing contract after the agent chooses his effort level. This means that no effort level above the minimum can be implemented in pure strategies when the principal and the agent have homogeneous beliefs. With overconfidence, the optimal risk-sharing contract provides payments that increase in outcome to exploit the agent’s overconfidence. The agent anticipates the exploitative contract and willingly chooses higher than minimum effort in equilibrium. Providing the agent rent can increase the slope of the optimal risk-sharing contract and, therefore, expand the set of implementable effort levels. In a mixed-strategy equilibrium, overconfidence simultaneously decreases the risk in the second-best contract and increases the risk in the optimal risk-sharing contract, increasing the probability of high effort in equilibrium. Keywords: Overconfidence; Moral hazard; Renegotiation; Commitment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:119:y:2025:i:c:s030440682500062x DOI: 10.1016/j.jmateco.2025.103145 Access Statistics for this article Journal of Mathematical Economics is currently edited by Atsushi (A.) Kajii More articles in Journal of Mathematical Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.