Nicola Pavoni (Bocconi University) (webinar)
28 October 2020 @ 12:00 - 13:15
“Optimal Delegation and Information Transmission under Limited Awareness, with an Application to Financial Intermediation”
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 has superior awareness of the set of actions that are actually feasible. The agent decides which of the available actions to reveal and which ones to hide.
We show that the agent often finds it optimal to leave the principal unaware of some relevant options. By doing so, the agent increases the principal’s cost of distorting the agent’s choices and thereby increases the principal’s willingness to grant him higher information rents. We also consider communication between the principal and the agent after the contract is signed and the agent observes information. Limited awareness of actions improves information transmission in such signalling games as the principal makes a coarser inference form agent’s choices: the lower the receiver awareness the fewer the potential alternatives the principal/receiver compares to the observed choice by the informed agent/sender.
We incorporate baseline model to financial intermediation, allowing for imperfect competition. Markets are often polarized, with some banks revealing all investment options and others revealing few. Self-reported data from customers in the Italian retail investment sector shows support for the model.
(joint with Sarah Auster)