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Revelation principle under strategic uncertainty: application to financial contracts with limited liability

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  • Dai ZUSAI

Abstract

We consider a principal-agent model in which the principal can terminate the agent's project and an outsider can affect the project's result. Only the agent can observe the outsider's action and sends a message to the principal. Under strategic uncertainty about the outsider's action in complete information, sequential equilibrium is a suitable equilibrium concept to select the robust outcome and to completely identify the underlying posterior belief. We prove the revelation principle for sequential equilibrium in such a game. Based on this revelation principle, we present a legitimate and simple form of the limited liability constraint on a financial contract that is robust to strategic uncertainty.

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  • Dai ZUSAI, 2022. "Revelation principle under strategic uncertainty: application to financial contracts with limited liability," TUPD Discussion Papers 24, Graduate School of Economics and Management, Tohoku University.
    • Handle: RePEc:toh:tupdaa:24
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    File URL: http://hdl.handle.net/10097/00135594
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