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Solution Concepts of Principal-Agent Models with Unawareness of Actions

Author

Listed:
  • Ying-Ju Chen

    (University of California at Berkeley, 4121 Etcheverry Hall, Berkeley, CA 94720, USA)

  • Xiaojian Zhao

    (Department of Economics, Hong Kong University of Science and Technology, Hong Kong)

Abstract

In numerous economic scenarios, contracting parties may not have a clear picture of all the relevant aspects. A contracting party may be unaware of what she and/or others are entitled to determine. Therefore, she may reject a contract that is too good to be true. Further, a contracting party may actively exert cognitive effort before signing a contract, so as to avoid being trapped into the contractual agreement ex post. In this paper, we propose a general framework to investigate these strategic interactions with unawareness, reasoning and cognition and intend to unify the solution concepts in the contracting context with unawareness. We build our conceptual framework upon the classical principal-agent relationship and compare the behaviors under various degrees of the unaware agent’s sophistication.

Suggested Citation

  • Ying-Ju Chen & Xiaojian Zhao, 2013. "Solution Concepts of Principal-Agent Models with Unawareness of Actions," Games, MDPI, vol. 4(3), pages 1-24, August.
    • Handle: RePEc:gam:jgames:v:4:y:2013:i:3:p:508-531:d:28416
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    2. Erlei Mathias & Schenk-Mathes Heike, 2017. "Bounded Rationality in Principal-Agent Relationships," German Economic Review, De Gruyter, vol. 18(4), pages 411-443, December.

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