On the Range of Applicability of the First-order Approach to Agency Problems

Oscar Gutierrez ()
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Oscar Gutierrez: Universitat Autonoma de Barcelona

Annals of Economics and Finance, 2024, vol. 25, issue 2, 649-662

Abstract: This note examines the range of applicability of the first-order approach to principal-agent problems under moral hazard. We show the existence of parameter configurations where the solution given by Holmstrom (1979)-Jewitt (1988) stops working to provide the second-best contract. The problem arises when the agent's reservation utility is below a certain threshold, which is associated with the fact that the contract lacks a fixed component.

Keywords: Moral Hazard; Principal-Agent Model; Second-Best Contract; First-Order Approach; Reservation Utility (search for similar items in EconPapers)
JEL-codes: D2 D8 G34 J33 M4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2024:v:25:i:2:gutierrez

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