Rationalizable Screening and Disclosure under Unawareness

TL;DR

This paper studies a principal-agent procurement model where the principal is unaware of some agent types, analyzing how communication and awareness influence optimal contracts and the incentives for types to reveal or raise awareness.

Contribution

It introduces a rationalizability framework with log-concavity and reverse Bayesianism to analyze awareness and incentives in procurement under unawareness.

Findings

High-cost types want to raise awareness if initially unaware of them.

Lower-cost types benefit from raising awareness of high-cost types, gaining extra rent.

When more than three types exist, incentives to raise awareness may diminish or cease.

Abstract

We analyze a principal-agent procurement problem in which the principal (she) is unaware some of the marginal cost types of the agent (he). Communication arises naturally as some types of the agent may have an incentive to raise the principal's awareness (totally or partially) before a contract menu is offered. The resulting menu must not only reflect the principal's change in awareness, but also her learning about types from the agent's decision to raise her awareness in the first place. We capture this reasoning in a discrete concave model via a rationalizability procedure in which marginal beliefs over types are restricted to log-concavity, ``reverse'' Bayesianism, and mild assumptions of caution. We show that if the principal is ex ante only unaware of high-cost types, all of these types have an incentive raise her awareness of them -- otherwise, they would not be served. With three types, the two lower-cost types that the principal is initially aware of also want to raise her awareness of the high-cost type: Their quantities suffer no additional distortions and they both earn an extra information rent. Intuitively, the presence of an even higher cost type makes the original two look better. With more than three types, we show that this intuition may break down for types of whom the principal is initially aware of so that raising the principal's awareness could cease to be profitable for those types. When the principal is ex ante only unaware of more efficient (low-cost) types, then \textit{no type} raises her awareness, leaving her none the wiser.