Optimal contracts when the players think differently Articles uri icon

publication date

  • March 2025

International Standard Serial Number (ISSN)

  • 0938-2259

Electronic International Standard Serial Number (EISSN)

  • 1432-0479

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.

subjects

  • Economics

keywords

  • contracting; heterogeneous beliefs; monotone likelihood ratio; moral hazard