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Certainty Equivalence and Noisy Redistribution

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  • Stéphane Gauthier

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies)

  • Guy Laroque

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, UCL - University College of London [London], IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies)

Abstract

This paper assesses the usefulness of stochastic contracts in the presence of informational asymmetries. It identifies circumstances where a stochastic redistribution policy is socially dominated by the deterministic policy where after-tax income lotteries are replaced with their certainty equivalent. It also provides a parametric example where every stochastic menu which has the optimal deterministic menu as certainty equivalent is dominated by the deterministic menu, while there exist feasible and incentive compatible lotteries improving locally upon the deterministic menu.

Suggested Citation

  • Stéphane Gauthier & Guy Laroque, 2021. "Certainty Equivalence and Noisy Redistribution," SciencePo Working papers Main halshs-03359574, HAL.
    • Handle: RePEc:hal:spmain:halshs-03359574
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03359574
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    References listed on IDEAS

    as
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    Keywords

    Asymmetric information; Random contracts; Certainty equivalent;
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