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Optimal Delegation and Information Transmission under Limited Awareness

Author

Listed:
  • Sarah Auster

    (Department of Economics, University of Bonn)

  • Nicola Pavoni

    (Department of Economics, Bocconi University)

Abstract
We study the delegation problem between a principal and an agent, who not only has better information about the performance of the available actions but also superior awareness of the set of actions that are actually feasible. We provide conditions under which the agent finds it optimal to leave the principal unaware of relevant options. By doing so, the agent increases the principal's cost of distorting the agent's choices and increases the principal's willingness to grant him higher information rents. We further show that the principal may use the option of renegotiation as a tool to implement actions that are not describable to her at the contracting stage. If the agent renegotiates, his proposal signals information about the payoff state. Due to her limited awareness, the principal makes a coarse inference from the agent's recommendations and, as a result, accepts a large number of the agent's proposals, which ultimately benefits both.

Suggested Citation

  • Sarah Auster & Nicola Pavoni, 2021. "Optimal Delegation and Information Transmission under Limited Awareness," ECONtribute Discussion Papers Series 059, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:059
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_059_2021.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Schipper, Burkhard C., 2021. "Discovery and equilibrium in games with unawareness," Journal of Economic Theory, Elsevier, vol. 198(C).
    2. Martin Meier & Burkhard C. Schipper, 2022. "Conditional dominance in games with unawareness," Working Papers 351, University of California, Davis, Department of Economics.
    3. Dargnies, Marie-Pierre & Hakimov, Rustamdjan & Kübler, Dorothea, 2022. "Aversion to hiring algorithms: Transparency, gender profiling, and self-confidence," Discussion Papers, Research Unit: Market Behavior SP II 2022-202, WZB Berlin Social Science Center.
    4. Gui, Zhengqing & Huang, Yangguang & Zhao, Xiaojian, 2024. "Financial fraud and investor awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 219(C), pages 104-123.
    5. Zhongwen Chen & Xiaojian Zhao, 2023. "Strategic Information Suppression in Borrowing and Pre-Lending Cognition: Theory and Evidence," Games, MDPI, vol. 14(3), pages 1-24, May.
    6. Gaia Belardinelli & Burkhard C. Schipper, 2023. "Implicit Knowledge in Unawareness Structures," Working Papers 360, University of California, Davis, Department of Economics.

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    More about this item

    Keywords

    Unawareness; optimal delegation; strategic disclosure;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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