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Contracting with Diversely Naïve Agents

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  • Kfir Eliaz
  • Ran Spiegler

Abstract

In standard contract-theoretic models, the underlying assumption is that agent types differ in their preference or cost parameters, and the principal's objective is to design contracts in order to screen this type. We study a contract-theoretic model in which the heterogeneity among agent types is of a “cognitive” nature. In our model, the agent has dynamically inconsistent preferences. Agent types differ only in their degree of “sophistication”, that is, their ability to forecast the change in their future tastes. We fully characterize the menu of contracts which the principal offers in order to screen the agent's sophistication. The menu does not exclude any type: it provides a perfect commitment device for relatively sophisticated types, and “exploitative” contracts which involve speculation with relatively naive types. More naive types are more heavily exploited and generate a greater profit for the principal. Our results allow us to interpret real-life contractual arrangements in a variety of industries. Copyright 2006, Wiley-Blackwell.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000530.

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Date of creation: 19 Sep 2004
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Handle: RePEc:cla:levrem:122247000000000530

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  1. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
  2. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
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  8. Stefano DellaVigna & Ulrike Malmendier, 2004. "Overestimating Self_Control: Evidence from the Health Club Industry," NBER Working Papers 10819, National Bureau of Economic Research, Inc.
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  13. David Laibson & Leeat Yariv, 2007. "Safety in Markets: An Impossibility Theorem for Dutch Books," Levine's Bibliography 122247000000001746, UCLA Department of Economics.
  14. Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, vol. 71(3), pages 793-811, 05.
  15. Leeat Yariv, 2004. "Safety in Markets: An Impossibility Theorem for Dutch Books," Theory workshop papers 658612000000000072, UCLA Department of Economics.
  16. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
  17. Michele Piccione & Ariel Rubinstein, 2010. "Modeling the Economic Interaction of Agents with Diverse Abilities to Recognize Equilibrium Patterns," Levine's Working Paper Archive 506439000000000108, David K. Levine.
  18. Gilpatric, Scott M., 2008. "Present-biased preferences, self-awareness and shirking," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 735-754, September.
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