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Participation Constraints in Discontinuous Adverse Selection Models

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  • Martimort, David
  • Stole, Lars

Abstract

We present a set of necessary and sufficient conditions for a class of optimal control problems with pure state constraints for which the objective function is linear in the state variable but the objective function is only required to be upper semi-continuous in the control variable. We apply those conditions to a number of economic environments in contract theory where discontinuities in objectives prevail. Examples of applications include nonlinear pricing of digital goods, nonlinear pricing under competitive threat, and common agency models of regulation.

Suggested Citation

  • Martimort, David & Stole, Lars, 2020. "Participation Constraints in Discontinuous Adverse Selection Models," CEPR Discussion Papers 15251, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15251
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    More about this item

    Keywords

    Optimal control; Non-smooth optimization; Convex analysis; Type-dependent participation constraints; Principal-agent models;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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