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Many of our seminars and public events this year will continue as in person or as hybrid (online and in person) events.

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Unless otherwise specified, in-person seminars are open to the public. Please ensure you have informed the event contact as early as possible.

Those unable to join the seminars in-person are welcome to participate via zoom if the event is hybrid.

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About this event

We study the classical moral-hazard problem with hidden actions where both the agent and the principal are disappointment - (and risk-) averse in the sense of Gul 1991 and have a piecewise linear utility over monetary outcomes. The optimal contract for the case where only the agent is disappointment averse consists of three levels of payment: a standard fixed wage - equivalent to the agent's total perceived compensation including bonus and penalties - for middle outcomes, a (possible random) penalty wage/termination clause for low outcomes, and a bonus paid only for the highest outcome. This structure is commonly observed in practice and is in sharp contrast both to the results obtained under expected utility (e.g., complex schemes that finely depend on the model's primitives) and under other departures from expected utility (e.g., binary bonus schemes under loss aversion a la Koszegi-Rabin 2006). When both agent and principal are disappointment- and risk-averse, the optimal contract continues to be piecewise linear with some discrete jumps but consists of five distinct parts: the penalty/basic wage/bonus scheme described above and, in addition, two separate areas where the agent's pay is linearly increasing in outcome.