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Discussion Paper Details

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Title: Participation Constraints in Discontinuous Adverse Selection Models

Author(s): David Martimort and Lars Stole

Publication Date: September 2020

Keyword(s): convex analysis, non-smooth optimization, Optimal Control, Principal-Agent Models and type-dependent participation constraints

Programme Area(s): Industrial Organization

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 a number of economic environments in contract theory where discontinuities in objectives prevail. Examples of applications include nonlinear pricing of digital goods, nonlinear pricing under competitive threat, and common agency models of regulation.

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Bibliographic Reference

Martimort, D and Stole, L. 2020. 'Participation Constraints in Discontinuous Adverse Selection Models'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15251