Exploiting overconfidence: optimal contracts with heterogeneous beliefs

Nikolaj Niebuhr Lambertsen ()
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Nikolaj Niebuhr Lambertsen: Aarhus University

Economic Theory, 2025, vol. 79, issue 4, No 4, 1225-1254

Abstract: Abstract This study investigates a principal–agent model with moral hazard and heterogeneous beliefs. With homogeneous beliefs, moral hazard increases the contract’s sensitivity to the outcome to ensure that the agent does not take a lower action than that chosen by the principal. With heterogeneous beliefs, side betting between the principal and agent leads to actions whereby moral hazard decreases the contract’s sensitivity to the outcome to ensure that the agent does not take a higher action than that chosen by the principal. Conditions on the primitives of the model are provided for monotonicity of the optimal contract and applicability of the first-order approach.

Keywords: Heterogeneous beliefs; Moral hazard; Overconfidence (search for similar items in EconPapers)
JEL-codes: A12 D82 D86 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00199-024-01626-0

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