Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5100061 | Journal of Economic Theory | 2017 | 37 Pages |
Abstract
We investigate the effect of ambiguity and ambiguity attitude on the shape and properties of the optimal contract in an adverse selection model with a continuum of types, using the NEO-additive model. We show that it necessarily features efficiency and a jump at the top and pooling at the bottom of the distribution. Conditional on the degree of ambiguity, the pooling section may be supplemented by a separating section. As a result, ambiguity adversely affects the principal's ability to solve the adverse selection problem and therefore the least efficient types benefit from ambiguity with respect to risk. Conversely, ambiguity is detrimental to the most efficient types.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Raphaƫl Giraud, Lionel Thomas,