: On the Notion of the First Best in Standard Hidden Action Problems

Christian Ewerhart and Christoph Nitzsche

No 229, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: It is well known that ex-ante randomization can improve upon second best contracts in principal-agent problems. In this note, we show that even the �rst{best can be dominated by a random contract. Our example is cast in a standard textbook set-up with two e�ort levels and two states of nature.

Keywords: Hidden action; �rst{best; ex-ante randomization (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
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