Moral Hazard Under Ambiguity
Thibaut Mastrolia () and
Dylan Possamaï ()
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Thibaut Mastrolia: École Polytechnique
Dylan Possamaï: Columbia University
Journal of Optimization Theory and Applications, 2018, vol. 179, issue 2, No 5, 452-500
Abstract In this paper, we extend the classical Holmström and Milgrom contracting problem, by adding uncertainty on the volatility of the output for both the Agent and the Principal. We study more precisely the impact of the “Nature” playing against the Agent and the Principal, by choosing the worst possible volatility of the output. We solve the first-best and the second-best problems in this framework, and we show that optimal contracts are in a class of contracts linear with respect to the output and its quadratic variation. We also present a general modus operandi to apply our method.
Keywords: Risk sharing; Moral hazard; Principal–Agent; Second-order BSDEs; Volatility uncertainty; Hamilton–Jacobi–Bellman–Isaacs PDEs; 91B40; 93E20; C61; C73; D82; J33; M52 (search for similar items in EconPapers)
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