Optimal contracts when the players think differently

Martin Dumav (), Urmee Khan () and Luca Rigotti ()
Additional contact information
Martin Dumav: Universidad Carlos III de Madrid
Urmee Khan: University of California Riverside
Luca Rigotti: University of Pittsburgh

Economic Theory, 2025, vol. 80, issue 3, No 8, 863-890

Abstract: Abstract In a canonical moral hazard problem with probabilistic but heterogeneous beliefs, we revisit existing results regarding first-best contracts and give a fair warning regarding the monotonicity of second-best contracts. We show that the standard monotonicity result with homogeneous beliefs extends to belief heterogeneity when the agent is more optimistic than the principal. However, in the reverse case—when the principal is more optimistic—the optimal contract can be non-monotone, breaking the link between compensation and performance.

Keywords: Contracting; Heterogeneous beliefs; Monotone likelihood ratio; Moral hazard (search for similar items in EconPapers)
JEL-codes: D82 D86 M52 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00199-025-01646-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:80:y:2025:i:3:d:10.1007_s00199-025-01646-4

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-025-01646-4

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().