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Top1. Introduction
Business researchers have long acknowledged the effects of asymmetric information on the enterprise’s decisions (Nikulin et al., 2018; Peysakhovich & Karmarkar, 2016; Schmidt & Buell, 2014). As the adjective signifies, asymmetric information alludes to a trade situation in which one party to the deal has more information than the second party (Dosis, 2018). This possibility, though seemingly an obvious proposition, has transformed current economic philosophy in the last 47 years (e.g., Modigliani-Miller theorem and the first fundamental theorem of welfare economics) (Bolton & Dewatripont, 2005). The known finance and economic literature has placed asymmetric information as a leading cause of adverse selection and moral hazard (Dosis, 2018).
Adverse selection refers to a situation in which two or more agents are preparing to settle business, and it occurs that one party possesses more information than the second party. Next, an investigation on adverse selection examines situations allowing for market segmentation according to a hidden quality (Houhamdi & Athamena, 2015, 2019). Note that market segmentation does not mainly derive from implicit information but slightly from a menu of contracts proposed to an agent that leads to self-selection, confessing his hidden information.
Nevertheless, a situation in which asymmetric information occurs after obtaining agreement between persons is known as moral hazard. The most used model to examine the moral hazard situation is the principal-agent problem, by which one principal desire to hire an agent for performing a particular task, but after signing the contract, the agent takes an action that is unobservable for the principal (hidden action) or obtains information about some context properties that the principal cannot obtain (hidden information). Contrary to the adverse selection case, in which the agent has proposed a menu of contracts, the moral hazard situation assumes that all agents receive an identical contract. Accordingly, the contract must consider more information asymmetries and therefore addresses the incentives problem.
Currently, the principal-agent model is employed extensively to discuss issues varying from corporate finance to the public economy. Quality control is the asymmetric information mitigation between the principal and agents by making actions visible (more accurately, contractible). Asymmetric information factors encompass all economics and finance fields. Realizing that asymmetric information is a source of considerable economic worthlessness, the emphasis is directed toward the description of techniques that might reduce the asymmetric information impacts.
The current paper considers a family of problems known as principal-agent (Shah, 2015) that characterized essentially by asymmetric information. It concentrates on the adverse selection problem related to asymmetric information. The first section describes our approach, defining the self-appraisal model of agent competence. Per the self-appraisal principles in psychology, the agent wants to know his competence to make the best decisions. The agent can determine his competence from others’ assessment and his experience (Suls, 2014). Our approach is based on the collaboration between a senior and a junior. Then, the junior uses his productivity on a particular task to infer his competence. Finally, this report summarizes the main findings.
In the remaining of this paper, there are five sections. The first section gives an overview of the self-appraisal literature. The second section describes our proposed model. The third section addresses the model equilibrium. In the fourth section, we present a mathematical example. Finally, in the fifth section, we discuss the outcomes of our two hypotheses.