Rationalizable Screening and Disclosure Under Unawareness

Abstract

This paper analyzes a principal-agent procurement problem in which the principal is unaware of events affecting the agent's marginal costs. Since she does not conceive of all relevant events, her planned menu of contracts may be suboptimal. Communication arises naturally as some types of the agent may have an incentive to make the principal aware of some of those events before a contract menu is offered. The menu must not only reflect the principal's change in awareness, however: She also learns about the agent's types, as not all of them may have incentives to raise her awareness. We capture this reasoning through an extensive-form version of cautious rationalizability with beliefs on marginal cost types restricted to logconcavity and reverse Bayesianism (Karni and Viero, 2013). We show that if initially the principal is only unaware of some low marginal cost types, she is not made aware of all types and there is bunching at the top. If the principal is only unaware of some high marginal cost types, then she becomes aware of all types. Thus, the principal is happily made aware of inefficiencies but kept tacitly in the dark about some efficiencies. In any case, the principal offers an optimal menu of contracts for all types of which she is or has become aware. The possibility of disclosure improves ex post social welfare but does not always eradicate welfare frictions due to asymmetric awareness.