Bray Theory Workshop

We propose a theory of contracts with frames. Frames are used by a contract designer to affect how an agent evaluates various options in the contract. The effect of the frame is not persistent, and the agent can renege on the contract after the effect wears off. We observe that framing does not increase the designer's profit when the agent does not have private information or when framing decreases the agent's willingness to pay. Framing increases profit when it increases willingness to pay in a way that does not distort incentives too much. We characterize the profit-maximizing contract in specific environments, and study applications to price discrimination, insurance, and auctions.

Paper is available online at http://www.kellogg.northwestern.edu/faculty/salant/personal/Papers/Contracts_with_Framing_Salant_Siegel.pdf