Robust contracting under common value uncertainty

Sarah Auster ()
Additional contact information
Sarah Auster: Department of Decision Sciences and IGIER, Bocconi University

Theoretical Economics, 2018, vol. 13, issue 1

Abstract: A buyer makes an offer to a privately informed seller for a good of uncertain quality. Quality determines both the seller's valuation and the buyer's valuation and the buyer evaluates each contract according to its worst-case performance over a set of probability distributions. The paper demonstrates that the contract that maximizes the minimum payoff over all possible probability distributions of quality is a screening menu that separates all types, whereas the optimal contract for any given probability distribution is a posted price, which induces bunching. Using the ϵ-contamination model, according to which the buyer's utility is a weighted average of his single prior expected utility and the worst-case scenario, the analysis further shows that for intermediate degrees of confidence the optimal mechanism combines features of both of these contracts.

Keywords: Ambiguity aversion; optimal contracting; lemons problem (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 (search for similar items in EconPapers)
Date: 2018-01-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://econtheory.org/ojs/index.php/te/article/viewFile/20180175/19823/586 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:2385

Access Statistics for this article

Theoretical Economics is currently edited by Federico Echenique, Mira Frick, Pablo Kurlat, Juuso Toikka, Rakesh Vohra

More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().