Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation

60 Pages Posted: 17 Jan 2018

See all articles by Sarah Auster

Sarah Auster

Bocconi University - Baffi Carefin Centre

Nicola Pavoni

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Centre for Economic Policy Research (CEPR)

Date Written: January 11, 2018

Abstract

We study the delegation problem between an investor and a financial intermediary, who not only has better information about the performance of the different investments but also has superior awareness of the available investment opportunities. The intermediary decides which of the feasible investments to reveal and which ones to hide. We show that the intermediary finds it optimal to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, but leaves the investor unaware of intermediate options. We further study the role of competition between intermediaries and allow for investors with different levels of awareness to coexist in the same market. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model: more knowledgeable investors receive richer menus that are nevertheless perceived to have less products at the extremes.

JEL Classification: D82, D83, G24

Suggested Citation

Auster, Sarah and Pavoni, Nicola, Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation (January 11, 2018). BAFFI CAREFIN Centre Research Paper No. 2018-69, Available at SSRN: https://ssrn.com/abstract=3102831 or http://dx.doi.org/10.2139/ssrn.3102831

Sarah Auster

Bocconi University - Baffi Carefin Centre ( email )

Via Roentgen 1
Milan
Italy

Nicola Pavoni (Contact Author)

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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