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.
Classification
subjects
Economics
keywords
contracting; heterogeneous beliefs; monotone likelihood ratio; moral hazard