Certainty Equivalence and Noisy Redistribution

Stéphane Gauthier (1, 2, 3) , Guy Laroque (4, 5, 3)

1 PSE - Paris School of Economics
2 PJSE - Paris Jourdan Sciences Economiques
3 IFS - Laboratory of the Institute for Fiscal Studies
4 ECON - Département d'économie (Sciences Po)
5 UCL - University College of London [London]

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.

Mots clés: Asymmetric information; Random contracts; Certainty equivalent

Domaines: Economies et finances

Stéphane Gauthier, Guy Laroque. Certainty Equivalence and Noisy Redistribution. 2021. ⟨halshs-03359574⟩