This paper studies a contract between an optimistic agent and a realistic principal, both risk-neutral. Even with complete contracts and ex-ante symmetric information, it may be impossible to achieve the first-best unless the weight on emotions is sufficiently low.

Conditioning variables on consumer choices are conventionally included in demand functions additively. We identify the underlying utility maximisation problem. There must be base consumption levels efficiently set which vary with the conditioning variables. A special case is quasi-homothetic...