Study on Effect of Agent´s Overconfidence on Principal-Agent Relationship

A great deal of the psychological literature shows that individuals always appear to be overconfident preference in their economic life. Studying the influence of agent´s overconfidence preference on principal-agent relationship has very profound theoretical and practical significance. Using the expressing methods of overconfidence provided by Daniel , Hirshleifer , Subrahmanyam , Gervais and Odean etc. for reference, this paper researches the principal-agent relationship model under the condition that the agent is overconfident, and the effect mechanism of the agent´s overconfidence on the principal-agent relationship by setting up an appropriate mathematical model. The result shows that when the agent´s active wage and the principal´s monitoring cost are not zero, the optimal level of effort exerted by the agent in equilibrium would always increase in the agent´s overconfident level and the principal´s optimal intensity of monitoring in equilibrium would always decrease in the agent´s overconfident level; and when the agent´s active wage is zero, the agent´s overconfidence would not affect the principal-agent relation. In addition, the optimal level of effort exerted by the agent and the principal´s optimal intensity of monitoring in equilibrium would always decrease in the principal´s monitoring cost, and the former would increase in the agent´s fixed wage and active wage, and the latter would yet increase in the agent´s fixed wage, but not always increase in the agent´s active wage.