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Contracting in Vague Environments

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  • VierAy, Marie-Louise

Abstract

This paper shows that a new trade-o arises in the optimal contract when contracting takes place with vague information (objective ambiguity), re ecting that real-world contracting often takes place under imprecise information. The choicetheoretic framework captures a decision-maker's attitude towards vagueness by his optimism. The new trade-o is between (a) incentive provision and (b) exploitation of heterogeneity that arises endogenously because of the vague environment. Consequently, the optimal contract may distort eort 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.

Suggested Citation

  • VierAy, Marie-Louise, 2006. "Contracting in Vague Environments," Queen's Economics Department Working Papers 273582, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273582
    DOI: 10.22004/ag.econ.273582
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    References listed on IDEAS

    as
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