The Study Of Principal-Agent Model Based On Overconfidence And Effort Level

Psychologists and economists have recognized the coexistence of risk aversionand overconfidence, when market demand or result output is uncertain. When facedwith uncertain, the risk decision maker may avoid risk for fear of the income risk.When faced with uncertain information, decision makers always tend tooverestimation of one’s actual performance, overplacement of one’s performancerelative to others, and excessive precision in one’s beliefs. This paper considers aprincipal-agent relationship in a single product supply chain which consists of a singlesupplier and a single retailer. It studies the influence of overconfidence and riskaversion attitude to the design of principle-agent mechanism and profit distribution.And theoretical guidance is provided for solving problems about overconfidence andrisk aversion.First of all, this paper demonstrates the origin and significance of the topic withpractical and theoretical concerns, claiming the rationality and innovation byrevisiting principle-agent model concerning overconfidence and risk attitudes.Furthermore, this paper reviews the related literature. Based on the classicalprincipal-agent model, Assume that the revenue is an effort level random function, thegoals of the decision makers are to maximize their expected profits. Firstly, we onlyconsider risk aversion of the decision maker, discussing the effects of different riskaversion on the optimal effort and the profit sharing coefficient. Secondly, weconsider the coexistence of risk aversion and overconfidence, discussing the infulenceof different risk aversion attitude and overconfidence level to the effort level andprofit sharing coefficient. Thirdly, without considering the moral hazard, assumingthat the agent’s effort level is under full supervision of the principal, we classified theprinciple-agent model from three angles: risk aversion only and the coexistence ofrisk aversion and effort level, agent’s effort only and joint efforts, with or withoutmoral hazard. By comparing the three different situations, we find the change ofeffort level and profit sharing coefficient. Finally, the main conclusion and futureresearch prospect are given.