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On the value of randomization

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  • Stéphane Gauthier

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Guy Laroque

    ()
    (IEP Paris - Sciences Po Paris - Institut d'études politiques de Paris - Institut d'Études Politiques [IEP] - Paris - PRES Sorbonne Paris Cité - Fondation Nationale des Sciences Politiques [FNSP])

Abstract

An optimal contract may involve randomization when the agents differ in their attitudes towards risk, so that randomization enables the principal to relax the incentive constraints. The paper provides a necessary and sufficient condition for local random deviations to be welfare improving in a neighborhood of a nonrandom optimum.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00639834.

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Date of creation: Oct 2011
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Handle: RePEc:hal:cesptp:halshs-00639834

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Keywords: Random taxation; stochastic contract; second best; tax evasion.;

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  1. Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1990. "Randomization in Optimal Income Tax Schedules," NBER Working Papers 3289, National Bureau of Economic Research, Inc.
  2. Joel Slemrod & Christian Traxler, 2010. "Optimal observability in a linear income tax," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2010_04, Max Planck Institute for Research on Collective Goods.
  3. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 15-80, Wharton School Rodney L. White Center for Financial Research.
  4. Weiss, Laurence, 1976. "The Desirability of Cheating Incentives and Randomness in the Optimal Income Tax," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1343-52, December.
  5. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, Elsevier, vol. 128(1), pages 306-314, May.
  6. Martin Hellwig, 2005. "The Undesirability of Randomized Income Taxation under Decreasing Risk Aversion," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2005_27, Max Planck Institute for Research on Collective Goods.
  7. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  8. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 50(2), pages 261-275, February.
  9. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(1), pages 25-48, Winter.
  10. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
  11. Carla Marchese & Fabio Privileggi, 2004. "Tax Amnesties and the Self-Selection of Risk-Averse Taxpayers," European Journal of Law and Economics, Springer, Springer, vol. 18(3), pages 319-341, December.
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Cited by:
  1. Philippe Choné & Romain De Nijs & Lionel Wilner, 2012. "Intertemporal Pricing with Unobserved Consumer Arrival Times," Working Papers, Centre de Recherche en Economie et Statistique 2012-23, Centre de Recherche en Economie et Statistique.

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