ESRC Centre for Economic Learning and Social Evolution
Abstract
In many principal-agent environments, the two parties hold different prior beliefs
regarding the agent's future preferences. These differences may be due to inherent biases
such as over-optimism or over-pessimism. We analyze the principal's optimal contract
design under the assumption that the agent's prior is private information. In order
to screen the agent's prior, the principal devises a menu of contingent contracts, some
of which are 'speculative' as they involve betting on the agent's future action. We
characterize the optimal menu and show that the characterization enables us to interpret
real-life contract design in a variety of economic contexts
