Optimal Delegation and Information Transmission under Limited Awareness

In this Economic Theory seminar Nicola Pavoni, from Bocconi University, discusses his paper on Optimal Delegation and Information Transmission under Limited Awareness

Abstract 

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 it is optimal for the agent to make the principal aware of extremes options, while leaving her unaware of intermediate ones.

We further show that unawareness has important effects on strategic information transmission: when principal and agent play a cheap talk game, reducing the principal’s awareness can expand the set of implementable equilibrium actions and thereby benefit both parties.