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Incentives for Unaware Agents

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Author Info

  • Ernst-Ludwig Von Thadden
  • Xiaojian Zhao

Abstract

The paper introduces the problem of unawareness into principal--agent theory and discusses optimal incentive contracts when the agent may be unaware of her action space. Depending on the agent's default behaviour, it can be optimal for the principal to propose an incomplete contract (that keeps the agent unaware) or a complete contract. The key trade-off is that of enlarging the agent's choice set versus adding costly incentive constraints. If agents differ in their unawareness, optimal contracts show a self-reinforcing pattern: if there are few unaware agents in the economy optimal contracts promote awareness, if unawareness is wide spread optimal contracts shroud the contracting environment, thus keeping the agent unaware. Copyright , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rdr050
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 3 ()
Pages: 1151-1174

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Handle: RePEc:oup:restud:v:79:y:2012:i:3:p:1151-1174

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. “Incentives for Unaware Agents,” E.L. von Thadden & X. Zhao (2012)
    by afinetheorem in A Fine Theorem on 2013-04-11 20:29:52
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Cited by:
  1. Spyros Galanis, 2011. "Syntactic foundations for unawareness of theorems," Theory and Decision, Springer, vol. 71(4), pages 593-614, October.
  2. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
  3. Robert Dur & Heiner Schmittdiel, 2013. "Paid to quit," Tinbergen Institute Discussion Papers 13-174/VII, Tinbergen Institute.
  4. Ying-Ju Chen & Xiaojian Zhao, 2013. "Solution Concepts of Principal-Agent Models with Unawareness of Actions," Games, MDPI, Open Access Journal, vol. 4(3), pages 508-531, August.
  5. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.

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