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Contracting with Diversely Naïve Agents

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  • Kfir Eliaz
  • Ran Spiegler

Abstract

A principal contracts with agents who have diverse abilities to forecast changes in their future tastes. While the principal knows that the agent’s tastes are changing, the agent believes that with probability ?, their future preferences will be identical to their present preferences. The principal does not observe ?, but knows the probability distribution from which it is drawn. Thus, the agent’s prior probability ? is their ‘private type’, and the principal has to offer a menu of contracts in order to screen the agent’s type. We provide a full characterization of the principal’s optimal menu. The results allow us to interpret some real-life contractual arrangements in a variety of examples.

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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. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, Econometric Society, vol. 1(2), pages 207-231, June.
  2. O'Donoghue, Ted & Rabin, Matthew, 2000. "Choice and Procrastination," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt5r26k54p, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Matt Shum & S Esteban & E Miyagawa, 2003. "Nonlinear Pricing with Self-Control Preferences," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 503, The Johns Hopkins University,Department of Economics.
  4. Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, Econometric Society, vol. 71(3), pages 793-811, 05.
  5. Stefano Della Vigna & Ulrike Malmendier, 2004. "Contract Design and Self-control: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(2), pages 353-402, May.
  6. David Laibson & Leeat Yariv, 2007. "Safety in Markets: An Impossibility Theorem for Dutch Books," Levine's Bibliography 122247000000001746, UCLA Department of Economics.
  7. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Ted O'Donoghue & Matthew Rabin, 1999. "Incentives For Procrastinators," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 769-816, August.
  9. George Loewenstein, Ted O'Donoghue and Matthew Rabin., 2000. "Projection Bias in Predicting Future Utility," Economics Working Papers, University of California at Berkeley E00-284, University of California at Berkeley.
  10. Malmendier, Ulrike M. & Della Vigna, Stefano, 2003. "Overestimating Self-Control: Evidence from the Health Club Industry," Research Papers, Stanford University, Graduate School of Business 1800, Stanford University, Graduate School of Business.
  11. Gilpatric, Scott M., 2008. "Present-biased preferences, self-awareness and shirking," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 67(3-4), pages 735-754, September.
  12. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1403-1435, November.
  13. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
  14. Leeat Yariv, 2004. "Safety in Markets: An Impossibility Theorem for Dutch Books," Theory workshop papers, UCLA Department of Economics 658612000000000072, UCLA Department of Economics.
  15. Michele Piccione & Ariel Rubinstein, 2002. "Modelling the Economic Interaction of Agents with Diverse Abilities to Recognise Equilibrium Patterns," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 440, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  16. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
  17. Roland Bénabou & Jean Tirole, 2002. "Self-Confidence And Personal Motivation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 871-915, August.
  18. Fang, Hanming & Moscarini, Giuseppe, 2005. "Morale hazard," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(4), pages 749-777, May.
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