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Participation constraints in discontinuous adverse selection models

Author

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  • Martimort, David

    (Paris School of Economics and EHESS)

  • Stole, Lars A.

    (Booth School of Business, University of Chicago)

Abstract

We present a set of necessary and sufficient conditions for a class of optimal control problems with pure state constraints for which the objective function is linear in the state variable but the objective function is only required to be upper semi-continuous in the control variable. We apply those conditions to economic environments in contract theory where discontinuities in objectives prevail. Examples of applications include nonlinear pricing of digital goods and nonlinear pricing under competitive threat.

Suggested Citation

  • Martimort, David & Stole, Lars A., 2022. "Participation constraints in discontinuous adverse selection models," Theoretical Economics, Econometric Society, vol. 17(3), July.
    • Handle: RePEc:the:publsh:3030
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    More about this item

    Keywords

    Optimal control; non-smooth optimization; convex analysis; type-dependent participation constraints; principal-agent models;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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