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Robust contracting under common value uncertainty
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Theoretical economics, 2018, Vol. 13, No. 1, pp. 175-204
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AUSTER, Sarah, Robust contracting under common value uncertainty, Theoretical economics, 2018, Vol. 13, No. 1, pp. 175-204 - https://hdl.handle.net/1814/59926
Abstract
A buyer makes an offer to a privately informed seller for a good of uncertain quality. Quality determines both the seller's valuation and the buyer's valuation, and the buyer evaluates each contract according to its worst-case performance over a set of probability distributions. This paper demonstrates that the contract that maximizes the minimum payoff over all possible probability distributions of quality is a screening menu that separates all types, whereas the optimal contract for any given probability distribution is a posted price, which induces bunching. Using the epsilon-contamination model, according to which the buyer's utility is a weighted average of his single prior expected utility and the worst-case scenario, the analysis further shows that for intermediate degrees of confidence, the optimal mechanism combines features of both of these contracts.
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First published: 01 February 2018
This is an open access article licensed under the Creative Commons Attribution-NonCommercial License 4.0 (http://econtheory.org)
This is an open access article licensed under the Creative Commons Attribution-NonCommercial License 4.0 (http://econtheory.org)