Speculative Contracts

Ran Spiegler () and Kfir Eliaz

No 5433, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose to view action-contingent contracts as bets, motivated by different prior beliefs between the contracting parties (rather than, say, as an instrument for overcoming moral hazard problems). Such differences in prior beliefs may arise from inherent biases such as over-optimism. Menus of contingent contracts that arise in principal-agent relationships are thus interpreted as a consequence of the principal's attempt to screen the agent's prior belief. Thus, an employer may offer his worker to choose between fixed-wage and profit-sharing schemes, in order to screen the worker's degree of optimism. We present a model of bilateral contracting which captures these ideas, characterize the optimal menu and apply it to a number of economic settings.

Keywords: Speculative trade; Non-common priors; Menus (search for similar items in EconPapers)
JEL-codes: D42 D82 L12 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-cse and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Speculative Contracts (2005)
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