Contracting for Innovation under Knightian Uncertainty
At any given point in time, the collection of assets existing in the economy is observable. Each asset is a function of a set of contingencies. The union taken over all assets of these contingencies is what we call the set of publicly known states. An innovation is a set of states that are not publicly known along with an asset (in a broad sense) that pays contingent on those states. The creator of an innovation is an entrepreneur. He is represented by a probability measure on the set of new states. All other agents perceive the innovation as ambiguous: each of them is represented by a set of probabilities on the new states. The agents in the economy are classified with respect to their attitude towards this Ambiguity: the financiers are (locally) Ambiguity-seeking while the consumers are Ambiguity-averse. An entrepreneur and a financier come together when the former seeks funds to implement his project and the latter seeks new profit opportunities. The resulting contracting problem does not fall within the standard theory due to the presence of Ambiguity (on the financier’s side) and to the heterogeneity in the parties’ beliefs. We prove existence and monotonicity (i.e., truthful revelation) of an optimal contract. We characterize such a contract under the additional assumption that the financiers are globally Ambiguity-seeking. Finally, we re-formulate our results in an insurance framework and extend the classical result of Arrow  and the more recent one of Ghossoub . In the case of an Ambiguity-averse insurer, we also show that an optimal contract has the form of a generalized deductible.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: C.P. 6128, Succ. centre-ville, Montréal (PQ) H3C 3J7|
Phone: (514) 343-6557
Fax: (514) 343-7221
Web page: http://www.cireq.umontreal.ca
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michele Boldrin & David K. Levine, 2002.
"Perfectly competitive innovation,"
303, Federal Reserve Bank of Minneapolis.
- Boldrin, Michele & Levine, David, 2002. "Perfectly Competitive Innovation," CEPR Discussion Papers 3274, C.E.P.R. Discussion Papers.
- Michele Boldrin & David K Levine, 2000. "Perfectly Competitive Innovation," Levine's Working Paper Archive 1996, David K. Levine.
- Michele Boldrin & David K Levine, 2006. "Perfectly Competitive Innovation," Levine's Working Paper Archive 618897000000000954, David K. Levine.
- Michele Boldrin & David K Levine, 2002. "Perfectly Competitive Innovation," Levine's Working Paper Archive 625018000000000192, David K. Levine.
- repec:dau:papers:123456789/2317 is not listed on IDEAS
- Schmeidler, David, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Econometric Society, vol. 57(3), pages 571-87, May.
- David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
- Hanqing Jin & Xun Yu Zhou, 2008. "Behavioral Portfolio Selection In Continuous Time," Mathematical Finance, Wiley Blackwell, vol. 18(3), pages 385-426.
- Alain Chateauneuf & Rose Anne Dana & Jean-Marc Tallon, 2000.
"Optimal risk-sharing rules and equilibria with Choquet-expected-utility,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
- Sujoy Mukerji & Jean-Marc Tallon, 2004.
"An overview of economic applications of David Schmeidler's models of decision making under uncertainty,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
- repec:dau:papers:123456789/2348 is not listed on IDEAS
- Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
- L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
- repec:dau:papers:123456789/5389 is not listed on IDEAS
- Carlier, G. & Dana, R.-A., 2005. "Rearrangement inequalities in non-convex insurance models," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 483-503, August.
- G. Carlier & R. Dana, 2008. "Two-persons efficient risk-sharing and equilibria for concave law-invariant utilities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 189-223, August.
- Mukerji, Sujoy, 1998.
"Ambiguity Aversion and Incompleteness of Contractual Form,"
American Economic Review,
American Economic Association, vol. 88(5), pages 1207-31, December.
- Mukerji, S., 1997. "Ambiguity aversion and incompleteness of contractual form," Discussion Paper Series In Economics And Econometrics 9715, Economics Division, School of Social Sciences, University of Southampton.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- repec:dau:papers:123456789/5456 is not listed on IDEAS
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Guillaume Carlier & Rose-Anne Dana, 2003. "Pareto efficient insurance contracts when the insurer's cost function is discontinuous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(4), pages 871-893, 06.
- Ghossoub, Mario, 2010. "Belief heterogeneity in the Arrow-Borch-Raviv insurance model," MPRA Paper 37630, University Library of Munich, Germany, revised 22 Mar 2012.
- Carlier, G. & Dana, R. A., 2003. "Core of convex distortions of a probability," Journal of Economic Theory, Elsevier, vol. 113(2), pages 199-222, December.
- repec:hal:journl:halshs-00451997 is not listed on IDEAS
- Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
- repec:dau:papers:123456789/5446 is not listed on IDEAS
- Paolo Ghirardato & Marciano Siniscalchi, 2010. "A more robust definition of multiple priors," Carlo Alberto Notebooks 144, Collegio Carlo Alberto.
- repec:dau:papers:123456789/5461 is not listed on IDEAS
- Rose-Anne Dana, 2002. "On Equilibria when Agents Have Multiple Priors," Annals of Operations Research, Springer, vol. 114(1), pages 105-115, August.
- repec:dau:papers:123456789/5394 is not listed on IDEAS
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-37, October.
- Ghossoub, Mario, 2011. "Monotone equimeasurable rearrangements with non-additive probabilities," MPRA Paper 37629, University Library of Munich, Germany, revised 23 Mar 2012.
When requesting a correction, please mention this item's handle: RePEc:mtl:montec:18-2012. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharon BREWER)
If references are entirely missing, you can add them using this form.