Moral hazard resolved by common-knowledge in principal-agent model

Authors:
Takashi Matsuhisa
Affiliations:
Department of Natural Science, Ibaraki National College of Technology, Nakane 866, Hitachinaka-shi, Ibaraki 312-8508, Japan
Venue:
International Journal of Intelligent Information and Database Systems
Year:
2012

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Abstract

This paper investigates the role of common-knowledge in the principal-agent model under uncertainty. We treat the problem: How epistemic conditions will be able to settle a moral hazard in team in the principal-agent model under uncertainty. We shall propose a resolution programme for the moral hazard in the principal-agent model by common-knowledge. Let us assume that the agents have the knowledge structure induced from a binary relation associated with the multi-modal logic S5n or S4n. We show that the moral hazard can be resolved in the principal-agent model under uncertainty if the agents commonly know all their own costs.