Analysis on effect of overconfidence on principal-agent contract

Using the expressing methods of overconfidence provided by Daniel, Hirshleifer, Subrahmanyam, Gervais and Odean etc. for reference, under the condition of hypothesizing the agent to be overconfident, this paper researches the mechanism of the agent´s overconfident preference affecting on the principal-agent contract by setting up an appropriate mathematical model. The result shows that the principal-agent contract that the agent obtains entire residual return and bears all operating risk and the principal only obtains fixed return corresponding to his fund and does not bear any operating risk is optimal for the principal under the hypothesis condition that the principal does not monitor the agent. Moreover, the fixed return that the principal could obtain is increased in the overconfident level of the agent and decreased in the agent´s reservation utility level.