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Contracting with Diversely Naive Agents

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  • Eliaz, Kfir
  • Spiegler, Ran

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.

Suggested Citation

  • Eliaz, Kfir & Spiegler, Ran, 2004. "Contracting with Diversely Naive Agents," CEPR Discussion Papers 4573, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4573
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    References listed on IDEAS

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    More about this item

    Keywords

    contracts; dynamic inconsistency; naivety; non-common priors;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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