Unawareness; Moral Hazard; Contract Theory; Screening; Limited Liability
We analyze a moral hazard problem with unaware agents and limited liability. A fraction of agents is unaware of their effort choice and chooses a default effort instead. The principal cannot observe whether an agent is unaware or not. He thus wants to screen the agents using a menu of contracts. Furthermore, the principal has the option to make all agents aware of their effort choice. The first paper treats the case of a monopolist principal. We show that under monopoly unawareness is self-reinforcing and contrast the results under limited liability with those under risk aversion. In the limited liability case, unaware agents can receive a rent and aware agents may loose from the presence of unaware agents. The second paper studies competing principals. Under competition, the share of unaware agents does not affect the equilibrium outcome. Agents are made aware even if this decreases total output. Thus, competition between principals can decrease efficiency.