Asymmetric Awareness and Heterogeneous Agents
Abstract
I consider the principal-agent model with asymmetric awareness and introduce heterogeneity of the agents on their aversion to effort. I discuss the optimal contract and market structure in a market with an aware principal and unaware agents. When the principal faces two types of agents, one being more effort-averse than the other, the contract he proposes either pools them, separates them, or excludes the more effort-averse agents of the market depending on their proportion. In a first-best world, all the agents remain unaware. In a second-best one, the principal increases the awareness of the agents, to a level which depends on the nature of the contract.
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