Participation constraints in discontinuous adverse selection models

Journal article: We present a set of necessary and sufficient conditions for a class of optimal control problems with pure state constraints for which the objective function is linear in the state variable but the objective function is only required to be upper semicontinuous in the control variable. We apply those conditions to economic environments in contract theory where discontinuities in objectives prevail. Examples of applications include nonlinear pricing of digital goods and nonlinear pricing under competitive threat.

Author(s)

David Martimort, Lars A. Stole

Journal
  • Theoretical Economics
Date of publication
  • 2022
Keywords JEL
D82 D86
Keywords
  • Optimal control
  • Nonsmooth optimization
  • Convex analysis
  • Type-dependent participation constraints
  • Principal-agent models
Pages
  • 1145-1181
Version
  • 1
Volume
  • 17