We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to Köszegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully...

We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to Köszegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully...

This paper demonstrates that a principal may optimally remunerate her agents unequally, even if these have equal characteristics. We show this in a simple moral hazard model where agents' efforts are continuous choice variables. Unequal remuneration allows the principal to minimize...