Optimal Delegation, Unawareness, and Financial Intermediation

Abstract

We study the delegation problem between an investor and a financial intermediary. The intermediary has private information about the state of the world that determines the return of the investment. Moreover, he has superior awareness of the available investment opportunities and decides whether to reveal some of them to the investor. We show that the intermediary generally has incentives 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 study how the extent to which the intermediary reveals available investment opportunities to the investor depends on the investor's initial awareness and the degree of competition between intermediaries in the market.