Optimal Delegation, Unawareness, and Financial Intermediation

Abstract

We study the delegation problem between an investor and a financial intermediary, who is not only privately informed about the state of the world but also has superior awareness of the available investment opportunities. Before the investor makes a delegation choice, the intermediary can expand the investor's awareness by revealing additional investment projects. We show that the intermediary finds it optimal to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, while leaving the investor unaware of intermediate investment options. We discuss the effect of competition and the policy implications of our findings. Joint work with Nicola Pavoni (Bocconi)