Common-knowledge and moral hazard in principal-agent model

Abstract

This article re-examines a principal-agent model with moral hazard from the epistemic point of view. It highlights hidden conditions for a possible resolution of the moral hazard between the principal and the agents. We show that the moral hazard in the principal agent model under uncertainty will not be appeared if the principal and agents could share fully information on their expected marginal costs in the following two cases: first they commonly known the marginal expected costs and secondly they communicate the costs as long run.