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Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation

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  • Sarah Auster
  • Nicola Pavoni

Abstract

We study the delegation problem between an investor and a nancial intermediary, who not only has better information about the performance of the di erent investments but also has superior awareness of the available investment opportunities. The intermediary decides which of the feasible investments to reveal and which ones to hide. We show that the intermediary nds it optimal to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, but leaves the investor unaware of intermediate options. We further study the role of competition between intermediaries and allow for investors with di erent levels of awareness to coexist in the same market. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model: more knowledgable investors receive richer menus that are nevertheless perceived to have less products at the extremes.

Suggested Citation

  • Sarah Auster & Nicola Pavoni, 2018. "Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation," BAFFI CAREFIN Working Papers 1869, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp1869
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    Cited by:

    1. Vladimir Asriyan & Dana Foarta & Victoria Vanasco, 2023. "The Good, the Bad, and the Complex: Product Design with Imperfect Information," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 187-226, May.
    2. Zhengqing Gui & Yangguang Huang & Xiaojian Zhao, 2020. "Financial Fraud and Investor Awareness," HKUST CEP Working Papers Series 202002, HKUST Center for Economic Policy.
    3. Asriyan, Vladimir & Foarta, Dana & Vanasco, Victoria, 2018. "Strategic Complexity When Seeking Approval," Research Papers 3615, Stanford University, Graduate School of Business.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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