Behavioural Biases and Contract Theory

This thesis studies how concepts of behavioural biases and bounded rationality affect classical results in contract theory and industrial organization. Chapter 2 studies the concept of naïveté (Strotz, 1956) in a principal agent model. Agents are assumed to be unaware of their true type, and formbiased (naïve) beliefs about it. The latter depend on the actual type of the agent. Results show how the information about agents’ true nature, that can be elicited from their beliefs, plays a crucial role in the principal’s optimal contracting strategy. In particular, the principal faces a trade-off between exploiting the agent with the most naïve beliefs and designing efficient contracts for the most widespread type of agent, according to her posteriors. Chapter 3 and Chapter 4 analyse models where agents suffer from temptation and self-control problems (à la Gul and Pesendorfer, 2001). Chapter 3 presents a new justification for loyalty schemes in the retailing industry. In the literature, loyalty schemes have been mostly studied as competition devices (Caminal and Claici, 2007) or as ways to increase consumers’ lifetime value (Caminal, 2012). This work focuses on how a seller can use loyalty schemes to acquire information about consumers’ preferences and gain the ability to perform individual pricing. Finally, Chapter 4 presents a two-period mechanism design problem with no commitment. It shows how the presence of consumers that suffer from self-control problems can explain the existence of entry bonuses paid by the seller to the consumer, regardless of whether the latter makes the purchase or not.