Working Paper: CEPR ID: DP4573
Authors: Kfir Eliaz; Ran Spiegler
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 ?, their future preferences will be identical to their present preferences. The principal does not observe ?, but knows the probability distribution from which it is drawn. Thus, the agent?s prior probability ? 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; Noncommon Priors
JEL Codes: L12; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Principal's contract offerings (M55) | Agents' choices based on forecasting abilities (C53) |
| Agents' beliefs about future preferences (D84) | Contract evaluations (K12) |
| Agents' naivete (D82) | Type of contract chosen (K12) |
| Principal's knowledge of agents' biases (D82) | Strategic design of contracts (L14) |
| Optimal menu structure (D40) | No crowding out of sophisticated types (E19) |