Robust Contracting in General Contract Spaces

TL;DR

This paper develops a broad theoretical framework for optimal mechanism design under uncertainty, establishing existence results and equivalences between centralized and delegated contracting, with applications in risk sharing and portfolio delegation.

Contribution

It introduces a general existence theory for mechanisms in complex contract spaces and shows equivalence between centralized and delegated contracting under minimal assumptions.

Findings

Existence of optimal mechanisms under minimal assumptions

Equivalence between centralized and delegated contracting

Applications to risk sharing and portfolio delegation models

Abstract

We consider a general framework of optimal mechanism design under adverse selection and ambiguity about the type distribution of agents. We prove the existence of optimal mechanisms under minimal assumptions on the contract space and prove that centralized contracting implemented via mechanisms is equivalent to delegated contracting implemented via a contract menu under these assumptions. Our abstract existence results are applied to a series of applications that include models of optimal risk sharing and of optimal portfolio delegation.