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Moral Hazard Under Ambiguity

Author

Listed:
  • Thibaut Mastrolia

    (École Polytechnique)

  • Dylan Possamaï

    (Columbia University)

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.

Suggested Citation

  • Thibaut Mastrolia & Dylan Possamaï, 2018. "Moral Hazard Under Ambiguity," Journal of Optimization Theory and Applications, Springer, vol. 179(2), pages 452-500, November.
    • Handle: RePEc:spr:joptap:v:179:y:2018:i:2:d:10.1007_s10957-018-1230-8
    DOI: 10.1007/s10957-018-1230-8
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    References listed on IDEAS

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    Cited by:

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    2. Jiajia Chang & Zhijun Hu & Hui Yang, 2020. "Venture Capital Contracting with Ambiguity Sharing and Effort Complementarity Effect," Mathematics, MDPI, vol. 8(1), pages 1-16, January.
    3. Bastien Baldacci & Dylan Possamaï, 2022. "Governmental incentives for green bonds investment," Mathematics and Financial Economics, Springer, volume 16, number 5, June.
    4. Felix-Benedikt Liebrich & Marco Maggis & Gregor Svindland, 2020. "Model Uncertainty: A Reverse Approach," Papers 2004.06636, arXiv.org, revised Mar 2022.
    5. Camilo Hern'andez & Dylan Possamai, 2023. "Time-inconsistent contract theory," Papers 2303.01601, arXiv.org.
    6. Bastien Baldacci & Dylan Possamai, 2021. "Governmental incentives for green bonds investment," Papers 2101.00648, arXiv.org.
    7. Daniel Krv{s}ek & Dylan Possamai, 2023. "Randomisation with moral hazard: a path to existence of optimal contracts," Papers 2311.13278, arXiv.org.

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