Asymmetric awareness of the contracting parties regarding the uncertainty surrounding them is proposed as a reason for incompleteness in contractual forms. An insurance problem is studied between a risk neutral insurer, who has superior awareness regarding the nature of the uncertainty, and a risk averse insuree, who cannot foresee all the relevant contingencies. The insurer can mention in a co...

We study a contractual design problem between a seller and a buyer where some information correlated with the buyer’s valuation is publicly observed ex-post and the allocation, but not payments, can be made contingent on it. Our analysis shows that, to maximize her profit, the seller should offer one contract in which the good is transferred to the buyer only if the ex-post signal turns out to ...

Rotten Kids with Bad Intentions We examine a "Rotten Kid" model (Becker 1974) where a player with social preferences interacts with an egoistic player. We assume that social preferences are intention-based rather than outcome-based. In a very general multi-stage setting we show that any equilibrium must involve mutually unkind behavior of both players, endogenously generating negative emotions ...

We present an equilibrium model of a moral-hazard economy with one firm and financial markets, where a stock and bonds are traded. We show that it is optimal for the principal to forbid the agent to trade the stock; that the second-best interest rate is lower than the first-best interest rate; and that the second-best equity premium can be higher or lower than the first best equity premium. We ...

a r t i c l e i n f o a b s t r a c t JEL classification: D82 D86 C72 C92 Keywords: Mechanism design Incentive theory Private information Laboratory experiment In the basic adverse selection model, a seller makes a contract offer to a privately informed buyer. A fundamental hypothesis of incentive theory is that the seller may want to offer a menu of contracts to separate the buyer types. In th...

Discretionary Latitude and Relational Contracting We use economic experiments to examine the nature of relational trading under a menu of incomplete contracts ranging from the repeat purchase mechanism of Klein and Leffler (1981) to highly incomplete contracts that are completely unenforceable by third-parties. Our results suggest that, with barriers to complete contracting, increasing the degr...

We study bargaining over contingent contracts in problems where private information becomes public or verifiable when the time comes to implement agreement. suggest a simple, two-stage game that incorporates important aspects of bargaining. characterize equilibria which parties always reach agreement, and their limits as frictions vanish. Under mild regularity conditions, we show all interim-ef...

We study subgame-perfect implementation (SPI) mechanisms that have been proposed as a solution to incomplete contracting problems. show these mechanisms, which are based on off-equilibrium arbitration clauses impose large fines for lying and the inappropriate use of arbitration, severe behavioral constraints because induce retaliation against legitimate uses arbitration. Incorporating reciproci...

We provide a new class of counter-examples to existence in a simple moral hazard problem in which the first-order approach is valid. In contrast to the Mirrlees example, unbounded likelihood ratios on the signal technology are not central. Rather, our examples center around the behavior of the utility function as utility diverges to negative infinity. For any utility function, such as ln(w), in...

We use a Barro–Becker model of endogenous fertility, in which parents are subject to idiosyncratic shocks that are private information (either to labor productivity or taste for leisure), to study the efficient degree of consumption inequality in the long run. The planner uses the trade-off between family size and future consumption and leisure, to provide incentives for workers to reveal their...