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Robust contracting under common value uncertainty

Author

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  • Auster, Sarah

    () (Department of Decision Sciences and IGIER, Bocconi University)

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.

Suggested Citation

  • Auster, Sarah, 2018. "Robust contracting under common value uncertainty," Theoretical Economics, Econometric Society, vol. 13(1), January.
  • Handle: RePEc:the:publsh:2385
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    References listed on IDEAS

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    1. Igor Kopylov, 2016. "Subjective probability, confidence, and Bayesian updating," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 635-658, October.
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    Cited by:

    1. repec:eee:gamebe:v:114:y:2019:i:c:p:285-307 is not listed on IDEAS
    2. Eran Hanany & Peter Klibanoff & Sujoy Mukerji, 2018. "Incomplete Information Games with Ambiguity Averse Players," Working Papers 868, Queen Mary University of London, School of Economics and Finance.

    More about this item

    Keywords

    Ambiguity aversion; optimal contracting; lemons problem;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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