Contracting with Diversely Naive Agents

51 Pages Posted: 7 Oct 2004

See all articles by Kfir Eliaz

Kfir Eliaz

Brown University

Ran Spiegler

Tel Aviv University - School of Economics

Date Written: August 2004

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 [theta], their future preferences will be identical to their present preferences. The principal does not observe [theta], but knows the probability distribution from which it is drawn. Thus, the agent's prior probability [theta] 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.

Keywords: Contracts, dynamic inconsistency, naivety, non-common priors

JEL Classification: L12, L14

Suggested Citation

Eliaz, Kfir and Spiegler, Ran, Contracting with Diversely Naive Agents (August 2004). Available at SSRN: https://ssrn.com/abstract=601963

Kfir Eliaz (Contact Author)

Brown University ( email )

Economics Dept.
Box B
Providence, RI 02912
United States
401-863-2112 (Phone)
401-863-1970 (Fax)

HOME PAGE: http://www.econ.brown.edu/fac/Kfir_Eliaz/

Ran Spiegler

Tel Aviv University - School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

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