We introduce a new knowledge operator called ``knowing whether.'' Knowing whether an event occurred means either knowing that it occurred or knowing that it did not occur. We demonstrate the following difference between ``knowing whether'' and ``knowing that.'' In a multiple agent model, a sequence of events generated by successively applying ``knowing that'' operators, or their negations, may ...

McAfee and Reny (1992) have given a necessary and sufficient condition for full surplus extraction in naive type spaces with a continuum of payoff types. We generalize their characterization to arbitrary abstract type spaces and to the universal type space and show that in each setting, full surplus extraction is generically possible. We interpret the McAfee-Reny condition as a much stronger ve...

We examine a general class of adaptive behavior models in which the distant past has only a weak effect on current actions, and assume that agents sometimes make mistakes, to show that average behavior (averaged over time) converges, with probability one, to a unique limit. Mistakes generate global convergence and are an equilibrium selection device; for small mistake probabilities the equilibr...

We study a problem of repeated moral hazard where the e¤ect of e¤ort is persistent over time: each period’s outcome distribution is a function of a distributed lag of past e¤orts. We show that when the utility of the agent is linear in e¤ort, a simple rearrangement of terms in his lifetime utility translates this problem into a standard repeated moral hazard. As a consequence, the optimal consu...

Recent research has cast some doubt on the general validity of outcome-based models of social preferences. We develop a model based on cognitive dissonance that focuses on the importance of self-image. An experiment (a dictator game variant) tests the model. First, we find that subjects whose choices involve two psychologically inconsistent cognitions indeed report higher levels of experienced ...

This paper analyzes the effects of moral hazard on long-run consumption or utility. Given exponential utility, it is shown that the utility of those with unobservable endowments becomes arbitrarily negative as long as any positive fraction of otherwise identical agents have observable endowments. Next, it is shown that assuming a finite number of agents results in essentially the same outcomes ...

What can be inferred, without assuming the Independence axiom, about an agent’s preferences over many-good lotteries from knowledge that the agent is income risk averse? We show that income risk aversion corresponds to an intuitive substitution property of the many-good lottery preferences that is, itself, equivalent to a standard definition of many-good risk aversion. We apply our approach to ...

We focus on syntactic aspects of differential awareness that give rise to contractual disputes. Boundedly rational parties use a common language, but do not share a common understanding of the world, leading to ambiguity in both syntactic and semantic forms. In contractual relationships, ambiguity leads to disagreement and disputes. We show that the agents may prefer simpler less ambiguous cont...

Individuals in many social networks imperfectly monitor other individuals’ network relationships. This paper shows that, in a model of a communication network, imperfect monitoring leads to the existence of many inefficient equilibria. Reasonable restrictions on actions or on beliefs about others’ actions can, however, eliminate many of these inefficient equilibria even with imperfect monitorin...

This paper answers the question posed in the title within a model where agents receive idiosyncratic, wage-rate shocks that are privately observed. When the model social insurance system is comprised by the US social security and income tax system, then the maximum ex-ante welfare gain to improved insurance is equivalent to a 12.3 percent increase in consumption. We determine the reasons behind...