On the value of randomization

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

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris School of Economics
3 Sciences Po - Sciences Po
4 Department of Economics

The paper identifies a necessary and sufficient condition for a deterministic local optimum to be locally improved upon by a stochastic deviation. When this condition is satisfied, a method to construct the stochastic allocations that increase the objective is provided. This technique is applied to a number of adverse selection and moral hazard problems.

Mots clés: second order conditions; constrained optimization; incentive constraints; random contracts

Domaines: Economies et finances

Stéphane Gauthier, Guy Laroque. On the value of randomization. Journal of Economic Theory, 2014, 151, pp.493-507. ⟨10.1016/j.jet.2014.02.006⟩. ⟨hal-00969344⟩