Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197144 
Authors: 
Year of Publication: 
2018
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 13 [Issue:] 1 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2018 [Pages:] 175-204
Publisher: 
The Econometric Society, New Haven, CT
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 e-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.
Subjects: 
Ambiguity
optimal contracting
lemons problem
JEL: 
D81
D82
D86
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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