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Moral Hazard With Unawareness

Author

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  • Xiaojian Zhao

    (CDSE, University of Mannheim, D-68131 Mannheim, Germany, xzhao@rumms.uni-mannheim.de)

Abstract

The article introduces unawareness of actions into the standard moral hazard model in contract theory. We allow the contracting party (the principal or the agent) to be unaware of his or the other party's actions. The principal may also have an incorrect belief about the awareness of the agent. We provide a solution concept where the principal contemplates the incentive scheme according to his conjecture of the agent's mind and also contemplates informing the agent through the contract. In the post-contractual stage, either party may be surprised by the other party's action. Finally, we analyze the value of awareness for each party, and present the negative result that awareness is not always valuable.

Suggested Citation

  • Xiaojian Zhao, 2008. "Moral Hazard With Unawareness," Rationality and Society, , vol. 20(4), pages 471-496, November.
    • Handle: RePEc:sae:ratsoc:v:20:y:2008:i:4:p:471-496
    DOI: 10.1177/1043463108096789
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    References listed on IDEAS

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    Cited by:

    1. Spyros Galanis, 2013. "Unawareness of theorems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 41-73, January.
    2. Zhao, Xiaojian, 2011. "Framing contingencies in contracts," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 31-40, January.
    3. Fukuda, Satoshi, 2021. "Unawareness without AU Introspection," Journal of Mathematical Economics, Elsevier, vol. 94(C).
    4. Ying-Ju Chen & Xiaojian Zhao, 2013. "Solution Concepts of Principal-Agent Models with Unawareness of Actions," Games, MDPI, vol. 4(3), pages 1-24, August.
    5. Antoine Dubus, 2020. "Asymmetric awareness and heterogeneous agents," Rationality and Society, , vol. 32(4), pages 461-484, November.
    6. Feinberg, Yossi, 2012. "Games with Unawareness," Research Papers 2122, Stanford University, Graduate School of Business.
    7. Spyros Galanis, 2011. "Syntactic foundations for unawareness of theorems," Theory and Decision, Springer, vol. 71(4), pages 593-614, October.
    8. Galanis, Spyros, 2007. "Unawareness of theorems," Discussion Paper Series In Economics And Econometrics 51816, Economics Division, School of Social Sciences, University of Southampton.
    9. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    10. Paulo Fagandini, 2018. "Hunting with two bullets: moral hazard with a second chance," Nova SBE Working Paper Series wp629, Universidade Nova de Lisboa, Nova School of Business and Economics.
    11. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.

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