31 Pages Posted: 20 Jul 2012 Last revised: 1 Sep 2013
Date Written: June 2013
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 effect 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, different 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: Suggested Citation
By Zhen Liu