Common-Knowledge and Cooperation Management II S4n-Knowledge Model Case

Abstract

Issues of moral hazard and adverse selection abound in each and every contract where one has a self interest and information that the other party does not possess, and there is still need for more information on how you handle a party to a contract with more information than you. This paper re-examines the issue in the framework of a principal-agent model under uncertainty. We highlight epistemic conditions for a possible resolution of the moral hazard between the principal and the agents with S4n-knowledge, and we show that if the principalr and agents commonly know each agent’s belief on the others’ efforts, then all effort levels such that the expected marginal costs actually coincide for them can be characterised as the critical points of the refunded proportional rate function. This implies our recommendation that, for removing out such moral hazard in the principal-agents cooperation, the principal and agents should commonly know their beliefs on the others’ effort levels.