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Certainty Equivalence and Noisy Redistribution

Stephane Gauthier and Guy Laroque

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Abstract: This paper assesses the usefulness of stochastic contracts in the presence of informational asymmetries. It identifies circumstances where a stochastic redistribution policy is socially dominated by the deterministic policy where after-tax income lotteries are replaced with their certainty equivalent. It also provides a parametric example where every stochastic menu which has the optimal deterministic menu as certainty equivalent is dominated by the deterministic menu, while there exist feasible and incentive compatible lotteries improving locally upon the deterministic menu.

Keywords: Asymmetric information; Random contracts; Certainty equivalent (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-upt
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