A Model of Complex Contracts

Alexander M. Jakobsen

American Economic Review, 2020, vol. 110, issue 5, 1243-73

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.

JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1257/aer.20190283

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