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I show that stochastic contracts generate powerful incentives when agents suffer from probability distortion. When … implementing these contracts, the principal can target probability distortions in order to inflate the agent's perceived benefits … of exerting high levels of effort. This novel source of motivation is absent in contracts traditionally regarded as …
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This paper studies the use of information for incentives and risk sharing in agency problems. When the principal is risk neutral or the outcome is contractible, risk sharing is unnecessary or completely taken care of by a contract on the outcome. In this case, information systems are ranked...
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