Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation
Sarah Auster and
Nicola Pavoni ()
No 1869, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy
We study the delegation problem between an investor and a nancial intermediary, who not only has better information about the performance of the di erent investments but also has superior awareness of the available investment opportunities. The intermediary decides which of the feasible investments to reveal and which ones to hide. We show that the intermediary nds it optimal to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, but leaves the investor unaware of intermediate options. We further study the role of competition between intermediaries and allow for investors with di erent levels of awareness to coexist in the same market. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model: more knowledgable investors receive richer menus that are nevertheless perceived to have less products at the extremes.
JEL-codes: D82 D83 G24 (search for similar items in EconPapers)
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