Incentives for Unaware Agents
Review of Economic Studies 79, 2012, 1151-1174
34 Pages Posted: 11 Nov 2011 Last revised: 24 Mar 2020
Date Written: September 1, 2011
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 behavior, it can be optimal for the principal to propose an incomplete contract (that keeps the agent unaware) or a complete contract. The key tradeoff 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.
Keywords: moral hazard, screening, incomplete contracts, unawareness
JEL Classification: D01, D86, D82, D83
Suggested Citation: Suggested Citation