  We study a model of moral hazard with heterogeneous beliefs where each of
agent's actions gives rise to a pair of probability distributions over output
levels, one representing the beliefs of the agent and the other those of the
principal. The agent's relative optimism or pessimism dictates whether the
contract is high-powered (i.e. with high variability between wage levels) or
low-powered. When the agent is sufficiently more optimistic than the principal,
the trade-off between risk-sharing and incentive provision may be eliminated.
Using Monotone Likelihood Ratio ranking to model disagreement in the parties'
beliefs, we show that incentives move in the direction of increasing
disagreement. In general, the shape of the wage scheme is sensitive to the
differences in beliefs. Thereby, key features of optimal incentive contracts
under common beliefs do not readily generalize to the case of belief
heterogeneity.
