Suren Basov

Incentives for Boundedly Rational Agents

This paper develops a theoretical framework for analyzing incentive schemes under bounded rationality. It starts from a standard principal-agent model and then superimposes an assumption of boundedly rational behavior on the part of the agent. Boundedly rational behavior is modeled as an explicit optimization procedure, which combines gradient dynamics with imitation and experimentation. The results predict the underprovision of optimal incentives and deviation from a standard sufficient statistics result from the agency literature. It also allows us to address the question of creating the optimal incentives in a multicultural environment.

Monopolistic Screening with Boundedly Rational Consumers

In this paper, I revisit the monopolistic screening problem with two types assuming that consumers are boundedly rational. Bounded rationality implies that the revelation principle does not apply and the choice of the selling mechanism entails a loss of generality. I show that if the monopolist restricts attention to the mechanisms that offer menus of two choices, the profits are lower than in the case of fully rational consumers by the term of order ln λ/λ, where λ is the degree of rationality of the consumers. The monopolist, however, can approximate the profits earned when consumers are fully rational by using a more elaborate message game. Copyright

Optimal Contracting Model in a Social Environment and Trust-Related Psychological Costs

Abstract Most research in contract theory concentrated on the role of incentives in shaping individual behavior. Recent research suggests that social norms also play an important role. From a point of view of a mechanism designer (a principal, a government, and a bank), responsiveness of an agent to the social norms is both a blessing and a curse. On the one hand, it provides the designer with extra instruments, while on the other it puts restrictions on how these new and the more conventional instruments can be used. The main objective of this paper is to investigate this trade-off and study how it shapes different contracts observed in the real world. We consider a model in which agent’s cost of cheating is triggered by the principal’s show of trust. We call such behavior a norm of honesty and trust and show that it drives incentives to be either low powerful or high powerful, eliminating contracts with medium powerful incentives.

Bertrand Oligopoly with Boundedly Rational Consumers

Abstract In this paper we consider a model of Bertrand oligopoly when consumers are boundedly rational and make their purchase decisions probabilistically, according to the Luce model. We consider three different cases: first, we characterize equilibrium when firms face boundedly rational consumers with the fixed irrationality parameter λ

On Sharia'a-Compliance and Return to Investment

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Market Niche, Flexibility and Commitment

; second, we discuss the case of obfuscating oligopoly, when firms can invest in order to confuse consumers, i.e. to increase their λ

When does Variety increase with Quality

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