A Model of Complex Contracts
American Economic Review · 2020 · Volume 110 · Issue 5
Abstract
I study a mechanism design problem involving a principal and a single, boundedly rational agent. The agent transitions among belief states by combining current beliefs with up to K pieces of information at a time. By expressing a mechanism as a complex contract—a collection of clauses, each providing limited information about the mechanism—the principal manipulates the agent into believing truthful reporting is optimal. I show that such bounded rationality expands the set of implementable functions and that optimal contracts are robust not only to variation in K , but to several plausible variations on the agent's cognitive procedure.
Keywords
Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory
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