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<p>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.</p>

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Optimal contracts when the players think differently

  • 期刊论文

  • 发表日期：

    2025年3月29日

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  • Martin Dumav,
  • Urmee Khan,
  • Luca Rigotti

摘要

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.