 Moral hazard and the spanning condition without the first-order approachGames and Economic Behavior, 2017, vol. 102, issue C, 373-387 Abstract: The “spanning condition” describes a situation where the agent's effort determines the weights placed on two distinct technologies. Sufficient conditions are known under which the first-order approach (FOA) is valid when the spanning condition holds. In this paper, a complete solution to the problem is provided. Thus, the problem is solved even when the FOA is not valid. The solution has two main steps. The first step fully characterizes the set of implementable actions. The second step establishes that the optimal contract can be found by applying the FOA to the newly identified set of feasible actions. This procedure correctly solves a famous counterexample due to Mirrlees in which the standard FOA is not valid. A much simpler and economically more compelling counterexample is provided. Moreover, the model provides a tractable environment in which it is possible to study comparative statics even when the FOA is not justified. Keywords: First-order approach; Moral hazard; Principal-agent models; Spanning condition (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:102:y:2017:i:c:p:373-387 DOI: 10.1016/j.geb.2017.01.001 Access Statistics for this article Games and Economic Behavior is currently edited by E. Kalai More articles in Games and Economic Behavior from Elsevier |
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