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Contracting in Vague Environments

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  • Marie-Louise Vier�

Abstract

This paper shows that a new trade-off arises in the optimal contract when contracting takes place with vague information (objective ambiguity), reflecting that real-world contracting often takes place under imprecise information. The choice-theoretic framework captures a decisionmaker's attitude towards vagueness by his optimism. The new trade-off is between incentive provision and exploitation of heterogeneity that arises endogenously because of the vague environment. Consequently, the optimal contract may distort effort in order to relax incentive compatibility and fully exploit the endogenously created heterogeneity, even when the agent is risk neutral and there is no insurance need in the relationship. (JEL D81, D82, D83, D86, L14)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.4.2.104
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 104-30

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Handle: RePEc:aea:aejmic:v:4:y:2012:i:2:p:104-30

Note: DOI: 10.1257/mic.4.2.104
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References

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  1. Guillaume Carlier & Ludovic Renou, 2005. "Debt Contracts with ex-ante and ex-post Asymmetric Information: An Example," School of Economics Working Papers 2005-03, University of Adelaide, School of Economics.
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  18. Marie-Louise Vierø, 2006. "Exactly What Happens After the Anscombe-Aumann Race? Representing Preferences in Vague Environments," Working Papers 1094, Queen's University, Department of Economics.
  19. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 57-82, January.
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Citations

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Cited by:
  1. Marie-Louise Vierø, 2006. "Exactly What Happens After the Anscombe-Aumann Race? Representing Preferences in Vague Environments," Working Papers 1094, Queen's University, Department of Economics.
  2. Hrabrin Bachev, 2013. "Risk Management in the Agri-food Sector," Contemporary Economics, University of Finance and Management in Warsaw, vol. 7(1), March.

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