In a setting with a wishful thinking agent and a realistic principal, the paper studies how incentive contracts should be designed to control for both moral hazard and self‐deception. The properties of the contract that reconcile the agent with reality depend on the weight the agent attaches to anticipatory utility. When this is small, principal and agent agree on full recollection. For intermediate values the principal bears an extra cost to make the agent recall bad news. For large weights, the principal gives up on inducing signal recollection. We also extend the analysis to the case in which the parameter of anticipatory utility is private information.
Contracts with wishful thinkers / Immordino, Giovanni; Menichini, A.; Romano, M.. - In: JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY. - ISSN 1058-6407. - 24:4(2015), pp. 863-886. [10.1111/jems.12113]
Contracts with wishful thinkers
Immordino G. ,;
2015
Abstract
In a setting with a wishful thinking agent and a realistic principal, the paper studies how incentive contracts should be designed to control for both moral hazard and self‐deception. The properties of the contract that reconcile the agent with reality depend on the weight the agent attaches to anticipatory utility. When this is small, principal and agent agree on full recollection. For intermediate values the principal bears an extra cost to make the agent recall bad news. For large weights, the principal gives up on inducing signal recollection. We also extend the analysis to the case in which the parameter of anticipatory utility is private information.File | Dimensione | Formato | |
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