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Multi-Task Agency with Unawareness

31 Pages Posted: 20 Jul 2012 Last revised: 1 Sep 2013

Ernst-Ludwig von Thadden

Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Xiaojian Zhao

Hong Kong University of Science & Technology (HKUST)

Date Written: June 2013

Abstract

The paper introduces the problem of unawareness into multi-dimensional Principal-Agent theory. We introduce two key parameters to describe the problem, the extent and the e ffect of unawareness, show under what conditions it is optimal for the Principal to propose an incomplete or a complete contract, and characterize the incentive power of optimal linear contracts. If Agents differ in their unawareness, optimal incentive schemes can be distorted for both aware and unaware Agents, because, di fferent from standard contract theory, the Single-Crossing Property fails to hold. In this case, even aware Agents can be subject to ineciently high or low incentives.

Keywords: Multi-task agency, unawareness, moral hazard, screening, incomplete contracts

JEL Classification: D01, D86, D82, D83

Suggested Citation

von Thadden, Ernst-Ludwig and Zhao, Xiaojian, Multi-Task Agency with Unawareness (June 2013). Available at SSRN: https://ssrn.com/abstract=2114055 or http://dx.doi.org/10.2139/ssrn.2114055

Ernst-Ludwig Von Thadden

Universitaet Mannheim ( email )

Department of Economics
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Xiaojian Zhao (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

999999

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