Thinking about contingencies, designing covenants and seeing through their implications is costly. Parties to a contract accordingly use heuristics and leave it incomplete. The paper develops a model of limited cognition and examines its consequences for contractual design. JEL numbers: D23, D82, D86, L22.

We construct both monotonic and non-monotonic symmetric Bayesian Nash equilibria for a two-player all-pay contest with binary types and correlated information structures. We also employ a class of parametric distributions to illustrate our equilibrium construction explicitly and to derive some comparative statics results. JEL classi…cations: C72, D44, D72, D82.

Common knowledge of a Borel event is shown to be a co-analytic event, and is therefore universally measurable. An extension of Aumann’s “agreement theorem” regarding common knowledge of posterior probabilities is proved in the framework of a measure space defined on a complete, separable, σ-compact metric space. JEL classification: D82, D83, D84

This note shows that oligopolistic loan competition with discriminatory pricing is inefficient when competing banks differ in their ability to screen borrowers: banks with better screening abilities win too small market shares. This result contrasts with a finding by Spence (1976) who showed that an oligopoly with price discrimination achieves first–best efficiency. JEL classification: D43; D82...

This paper considers political credibility of allocations in settings with dynamic private information. It embeds a benchmark dynamic moral environment into political economy games which feature repeated voting over mechanisms. Optimal politically credible allocations are shown to solve virtual planning problems with social discount factors in excess of the private one. JEL codes: C73, D72, D82...

We propose a tractable model of asset management in which benchmarking arises endogenously, and analyze its welfare consequences. Fund managers' portfolios are not contractible they incur private costs running them. Incentive contracts for fund managers create pecuniary externality through their effect on prices. Benchmarking inflates prices creates crowded trades. The crowding reduces the effe...

A principal owns a firm, hires an agent of uncertain productivity, and designs dynamic policy for evaluating his performance. The observes ongoing evaluations decides when to quit. When not quitting, the is paid wage that linear in expected productivity; claims residual After players secure fixed outside options. I show equilibrium Pareto efficient. For broad class performance technologies, det...

We analyze the incentives for showing off, which we model as a costly signaling game, and study consequences of norms against such behavior. Prior to competing in contest, newcomer can signal his talent an incumbent. In equilibrium, ability occurs only when is exceptionally talented. situations benefits both contestants: obvious reasons; incumbent by economizing on wasted effort contest. Our re...

We derive a new cost of information in rational inattention problems, the neighborhood-based functions, starting from observation that many settings involve exogenous states with topological structure. These functions are uniformly posterior separable and capture notions perceptual distance. This second property ensures costs, unlike mutual information, make accurate predictions about behavior ...

We use administrative data from Sweden to study adherence 63 medication-related guidelines. compare the of patients without personal access medical expertise that with access, namely doctors and their close relatives. estimate observably similar have 3.8 percentage points lower adherence, relative a baseline rate 54.4 percent among those access. Our findings suggest an important role in nonadhe...