Deterministic versus Stochastic Mechanisms in Principal–Agent Models

Roland Strausz ()

No 26, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper shows that, contrary to what is generally believed, decreasing concavity of the agent's utility function with respect to the screening variable is not sufficient to ensure that stochastic mechanisms are suboptimal. The paper demonstrates, however, that they are suboptimal whenever the optimal deterministic mechanism exhibits no bunching. This is the case for most applications of the theory and therefore validates the literature's usual focus on deterministic mechanisms.

Keywords: principal-agent theory; mechanism design; deterministic mechanisms; randomization; bunching. (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: Written
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Related works:
Working Paper: Deterministic versus Stochastic Mechanisms in Principal--Agent Models
Journal Article: Deterministic versus stochastic mechanisms in principal-agent models (2006)
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