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Theory and Decision

Erschienen in:

01.08.2014

Multi-task agency with unawareness

verfasst von: Ernst-Ludwig von Thadden, Xiaojian Zhao

Erschienen in: Theory and Decision | Ausgabe 2/2014

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Abstract

The paper introduces the problem of unawareness into multi-dimensional Principal–Agent theory. We introduce two key parameters to describe the problem, the extent and the effect of unawareness, show under what conditions it is optimal for the Principal to propose an incomplete or a complete contract, and characterize the incentive power of optimal linear contracts. If Agents differ in their unawareness, optimal incentive schemes can be distorted for both aware and unaware Agents, because, different from standard contract theory, the single-crossing property fails to hold. In this case, even aware Agents can be subject to inefficiently high or low incentives.

Vorheriger Artikel Axiomatizing bounded rationality: the priority heuristic

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In von Thadden and Zhao (2012), we study the properties of optimal contracts in the classic one-dimensional setting. However, in the general model it is difficult to characterize the incentive power of contracts and their comparative statics, which is the main focus of this paper.

We assume this form of contract because it is simple and captures two important elements of incentive contracting. It is worth noting that Holmström and Milgrom (1987) provide a foundation for this assumption in a dynamic setting.

Because \(\pi ^{\mathrm{A}}>0\), whenever \(\pi ^{\mathrm{U}}>\pi ^{\mathrm{A}}\), we get \(\pi ^{\mathrm{U}}>0\). Hence, the Principal always gains from proposing a contract.

This tradeoff, which also appears in von Thadden and Zhao (2012), provides a new perspective on the foundations of contract incompleteness, different from classical approaches such as verifiability (Grossman and Hart 1986; Hart and Moore 1990), signaling (Aghion and Bolton 1987; Spier 1992), explicit writing costs (Dye 1985; Anderlini and Felli 1999; Battigalli and Maggi 2002), strategic incompleteness (Bernheim and Whinston 1998; Dessi 2009, or limited cognition (Bolton and Faure-Grimaud 2010; Tirole 2009).

Note that \(2/(2+\sigma ^{2})\in \left( \tau _{\min },\tau _{\max }\right) \) defined in (18).

Without loss of generality, our figures focus on the case \(1<\sigma ^{2}<2\).

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Titel: Multi-task agency with unawareness
verfasst von: Ernst-Ludwig von Thadden
Xiaojian Zhao
Publikationsdatum: 01.08.2014
Verlag: Springer US
Erschienen in: Theory and Decision / Ausgabe 2/2014
Print ISSN: 0040-5833
Elektronische ISSN: 1573-7187
DOI: https://doi.org/10.1007/s11238-013-9397-9

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