Moral Hazard Resolved by Common-Knowledge in S5n Logic

Abstract

This article investigates the role of common-knowledge in the principal-agent model under asymmetric information. We treat the problem: How the common-knowledge condition will be able to settle a moral hazard problem in the principal-agents model under asymmetric information. We shall propose a solution program for the moral hazard in the principal-agents model under asymmetric information by common-knowledge. Let us assume that the agents have the knowledge structure induced from a partition relation associated with the multi-modal logic S5n. In particular we consider the situation that the agents commonly know all decision values of the other agents. Under certain assumptions we shall show the moral hazard can be resolved in the principal-agents model when all the expected marginal costs are common-knowledge among the principal and agents.