Rationalizable Screening and Disclosure under Unawareness

2025-10-23

AI Summary

This paper studies mechanism design in procurement when the principal is partially unaware of the agent’s marginal cost types. Addressing the agent’s strategic disclosure of overlooked types to influence contract terms, we develop a discrete concavity model integrating rationalizability, reverse Bayesian updating, and prudence assumptions to formalize the principal’s awareness evolution and belief revision. Our contributions are threefold: (1) We identify a non-monotonic disclosure incentive—when only high-cost types are initially overlooked, all types prefer disclosure; (2) In the three-type case, known types strategically reveal higher-cost types to extract information rents, but this incentive vanishes as the number of types increases; (3) We show that the persistence of inefficient types can Pareto-improve equilibrium payoffs for known types. Collectively, these results demonstrate that unawareness fundamentally reshapes incentive compatibility constraints and the structure of optimal screening mechanisms.

Technology Category

Game Theory and Economic Paradigms: Mechanism DesignMultiagent Systems: Mechanism DesignReasoning under Uncertainty: Sequential Decision Making

Application Category

Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystemsUser Modeling, Personalization and Recommendation: Fairness-aware retrieval and rankingSecurity and Privacy: Data transparency and provenance

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 extit{no type} raises her awareness, leaving her none the wiser.

Problem

• Analyzes procurement with unaware principal and cost types
• Models communication incentives for raising awareness pre-contract
• Explores rationalizability under log-concave beliefs and reverse Bayesianism

Innovation

• Rationalizability procedure with log-concave beliefs
• Reverse Bayesianism for updating awareness
• Discrete concave model with cautious assumptions