Precious Optimists——Optimal Contract under Ambiguity
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| Title | Precious Optimists——Optimal Contract under Ambiguity
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| Author | Yao Dongmin, Wang Qizhi , Li Junlin and Cui Lin |
| Organization | Central University of Finance and Economic; Renmin University of China |
| Email | yaodongminn@163.com；wangqizhi90@126.com；junlin.lee@ruc.edu.cn；cuilinnku@126.com |
| Key Words | Ambiguity; Optimal Contract; Neo-additive Capacity; Ambiguity Attitude |
| Abstract | Under ambiguity, where probabilities are unknown, Savage’s model is not applicable for describing a decision maker’s behavior. Since no valid distribution can be obtained, ambiguity perception and ambiguity attitude are introduced to account for the decision maker’s choice. In this paper, we used the Choquet Expected Utility (CEU) model with neo-additive capacity to study the optimal contract in an employment relationship. We found that1) optimistic employees can bring more profit to the employer because they are more easily motivated and 2) any optimal contract may fail if ambiguity factors are neglected. Based on these findings, we explain why positive attitudes such as optimism are often praised in corporate cultures and provide a potential reason for why some start-ups have satisfying earnings in the beginning but then fail when they grow bigger. These findings provide a new framework to understand a firm's decision-making behavior from the aspects of new institutional economics and behavioral economics together. |
| Serial Number | WP927 |
| Time | 2015-09-30 |
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