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On the value of randomization

Author

Listed:
  • Stéphane Gauthier

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Guy Laroque

    (Sciences Po - Sciences Po, Department of Economics - UCL - University College of London [London])

Abstract

The paper identifies a necessary and sufficient condition for a deterministic local optimum to be locally improved upon by a stochastic deviation. When this condition is satisfied, a method to construct the stochastic allocations that increase the objective is provided. This technique is applied to a number of adverse selection and moral hazard problems.

Suggested Citation

  • Stéphane Gauthier & Guy Laroque, 2014. "On the value of randomization," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00969344, HAL.
    • Handle: RePEc:hal:cesptp:hal-00969344
    DOI: 10.1016/j.jet.2014.02.006
    Note: View the original document on HAL open archive server: https://hal.science/hal-00969344
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    References listed on IDEAS

    as
    1. Slemrod, Joel & Traxler, Christian, 2010. "Optimal observability in a linear income tax," Economics Letters, Elsevier, vol. 108(2), pages 105-108, August.
    2. Weiss, Laurence, 1976. "The Desirability of Cheating Incentives and Randomness in the Optimal Income Tax," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1343-1352, December.
    3. Alberto Bennardo & Pierre-Andre Chiappori, 2003. "Bertrand and Walras Equilibria under Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 785-817, August.
    4. Richard Arnott & Joseph E. Stiglitz, 1988. "Randomization with Asymmetric Information," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 344-362, Autumn.
    5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    6. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, vol. 128(1), pages 306-314, May.
    7. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
    8. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    9. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1995. "Randomization in optimal income tax schedules," Journal of Public Economics, Elsevier, vol. 56(2), pages 189-223, February.
    10. Carla Marchese & Fabio Privileggi, 2004. "Tax Amnesties and the Self-Selection of Risk-Averse Taxpayers," European Journal of Law and Economics, Springer, vol. 18(3), pages 319-341, December.
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    Citations

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    Cited by:

    1. Lang, Matthias, 2017. "Legal uncertainty as a welfare enhancing screen," European Economic Review, Elsevier, vol. 91(C), pages 274-289.
    2. Stéphane Gauthier & Guy Laroque, 2022. "Optimal Random Taxation and Redistribution," SciencePo Working papers Main hal-03915336, HAL.
    3. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    4. Philippe Choné & Romain De Nijs & Lionel Wilner, 2012. "Intertemporal Pricing with Unobserved Consumer Arrival Times," Working Papers 2012-23, Center for Research in Economics and Statistics.
    5. Stéphane Gauthier & Guy Laroque, 2021. "Certainty Equivalence and Noisy Redistribution," SciencePo Working papers Main halshs-03359574, HAL.
    6. Pietro Ortoleva & Evgenii Safonov & Leeat Yariv, 2021. "Who Cares More? Allocation with Diverse Preference Intensities," Papers 2108.12025, arXiv.org.
    7. Gauthier, Stéphane & Laroque, Guy, 2017. "Redistribution by means of lotteries," Journal of Economic Theory, Elsevier, vol. 169(C), pages 707-716.
    8. repec:hal:pseose:hal-01158155 is not listed on IDEAS

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    More about this item

    Keywords

    second order conditions; constrained optimization; incentive constraints; random contracts;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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