Subjective ambiguity and moral hazard in a principal-agent model

Basili, Marcello and Franzini, Maurizio (2003) Subjective ambiguity and moral hazard in a principal-agent model. Working Paper. Dipartimento di Economia Pubblica, Università di Roma La Sapienza, Roma, Italia.


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It is suggested that individual behavior under ambiguity, or knightian uncertainty, may represent an alternative explanation for contractual incompleteness with respect to the traditional approach in terms of transactions costs. This paper aims at showing that the introduction of ambiguity in the economic analysis of contracts may be very fruitful. In particular, we analyze how ambiguity affects the optimal compensation scheme in a principal-agent framework, where the principal cannot observe the agent’s effort and, contrary to standard assumptions, is ambiguityaverse. Also, our model makes it possible to generalize the Mukerji (1998) approach to contractual incompleteness. In fact, it shows that incomplete contracts are costly and that, before reaching the conclusion that ambiguity leads to contractual incompleteness, their costs should be compared with those of complete contracts, other things being equal.

Item Type: Monograph (Working Paper)
Additional Information: JEL Classification: D82, L15, M52
Uncontrolled Keywords: ambiguity, agency, E-capacity, contractual incompleteness
Subjects: 300 Scienze sociali > 330 Economia
Depositing User: Dipartimento economia e diritto
Date Deposited: 10 Mar 2009
Last Modified: 20 May 2010 12:01

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