QED Working Paper Number
1212
This paper explores contracting in the presence of ambiguity. It revisits Holmstrom's sufficient 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. Specifically, uninformative ambiguous signals can be valuable.
Keywords
contracts
ambiguity
optimism
incentives
signals
stock options
Working Paper
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