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Incentives for Unaware Agents

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  • 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.

Suggested Citation

  • Ernst-Ludwig Von Thadden & Xiaojian Zhao, 2012. "Incentives for Unaware Agents," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1151-1174.
  • Handle: RePEc:oup:restud:v:79:y:2012:i:3:p:1151-1174
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    File URL: http://hdl.handle.net/10.1093/restud/rdr050
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    Citations

    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 2013-04-12 01:29:52

    Citations

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    Cited by:

    1. Wenjun Ma & Burkhard C. Schipper, 2017. "Does exposure to unawareness affect risk preferences? A preliminary result," Theory and Decision, Springer, vol. 83(2), pages 245-257, August.
    2. Schipper, Burkhard C., 2021. "Discovery and equilibrium in games with unawareness," Journal of Economic Theory, Elsevier, vol. 198(C).
    3. Katarina Kostelic, 2020. "Guessing the Game: An Individual’s Awareness and Assessment of a Game’s Existence," Games, MDPI, vol. 11(2), pages 1-28, March.
    4. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    5. Sarah Auster & Nicola Pavoni, 2020. "Limited Awareness and Financial Intermediation," ECONtribute Discussion Papers Series 043, University of Bonn and University of Cologne, Germany.
    6. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    7. Robert Dur & Heiner Schmittdiel, 2019. "Paid to Quit," De Economist, Springer, vol. 167(4), pages 387-406, December.
    8. Feinberg, Yossi, 2012. "Games with Unawareness," Research Papers 2122, Stanford University, Graduate School of Business.
    9. Zhengqing Gui & Yangguang Huang & Xiaojian Zhao, 2020. "Financial Fraud and Investor Awareness," HKUST CEP Working Papers Series 202002, HKUST Center for Economic Policy.
    10. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    11. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.
    12. Sarah Auster & Nicola Pavoni, 2021. "Optimal Delegation and Information Transmission Under Limited Awareness," CRC TR 224 Discussion Paper Series crctr224_2021_256v2, University of Bonn and University of Mannheim, Germany.
    13. Zhao, Xiaojian, 2011. "Framing contingencies in contracts," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 31-40, January.
    14. 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.
    15. Nicola Pavoni & Sarah Auster, 2016. "Optimal Delegation, Unawareness, and Financial Intermediation," 2016 Meeting Papers 1106, Society for Economic Dynamics.
    16. Canidio, Andrea & Karle, Heiko, 2022. "The focusing effect in negotiations," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 1-20.
    17. Schumacher, Heiner & Thysen, Heidi, 2017. "Equilibrium Contracts and Boundedly Rational Expectations," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168085, Verein für Socialpolitik / German Economic Association.
    18. 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.
    19. Spyros Galanis, 2011. "Syntactic foundations for unawareness of theorems," Theory and Decision, Springer, vol. 71(4), pages 593-614, October.
    20. Surajeet Chakravarty & David Kelsey & Joshua C. Teitelbaum, 2020. "Operationalizing Reverse Bayesianism," Discussion Papers 2020-18, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    21. Zhengqing Gui & Yangguang Huang & Xiaojian Zhao, 2018. "Whom to Educate? Financial Fraud and Investor Awareness," HKUST IEMS Working Paper Series 2018-52, HKUST Institute for Emerging Market Studies, revised Jan 2018.
    22. Surajeet Chakravarty & David Kelsey & Joshua C. Teitelbaum, 2018. "Tort Liability and Unawareness," Discussion Papers 1801, University of Exeter, Department of Economics.
    23. Wenjun Ma & Burkhard C. Schipper, 2017. "Does exposure to unawareness affect risk preferences? A preliminary result," Theory and Decision, Springer, vol. 83(2), pages 245-257, August.
    24. Ernst-Ludwig Thadden & Xiaojian Zhao, 2014. "Multi-task agency with unawareness," Theory and Decision, Springer, vol. 77(2), pages 197-222, August.
    25. Matteo Foschi, 2016. "Contracting with Type-Dependent Naïveté," Discussion Papers in Economics 16/03, Division of Economics, School of Business, University of Leicester.

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