Bait Contracts

This paper explores contracting in the presence of ambiguity. It revisits Holmstrom's (1979) suffcient statistic result of when to condition a contract on an outside signal. It is shown that if the signal is ambiguous, in the sense that its probability distribution is unknown, then Holmstrom's result can be overturned. Specically, uninformative ambiguous signals can be valuable.

Keywords

incentives, ambiguity, contracts, signals, Financial Economics, optimism

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