Incentives for unaware agents

Ernst Ludwig Von thadden, Xiaojian Zhao

Research output: Contribution to journalArticleResearchpeer-review

14 Citations (Scopus)

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.

Original languageEnglish
Article numberrdr050
Pages (from-to)1151-1174
Number of pages24
JournalReview of Economic Studies
Volume79
Issue number3
DOIs
Publication statusPublished - Jul 2012
Externally publishedYes

Keywords

  • Incomplete contracts
  • Moral hazard
  • Screening
  • Unawareness

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