On the first-order approach in principal-agent models with hidden borrowing and lending

Arpad Abraham (), Sebastian Koehne and Nicola Pavoni

Journal of Economic Theory, 2011, vol. 146, issue 4, 1331-1361

Abstract: We provide sufficient conditions for the validity of the first-order approach for two-period dynamic moral hazard problems where the agent can save and borrow secretly. The first-order approach is valid if the following conditions hold: (i) the agent has non-increasing absolute risk aversion utility (NIARA), (ii) the output technology has monotone likelihood ratios (MLR), and (iii) the distribution function of output is log-convex in effort (LCDF). Moreover, under these three conditions, the optimal contract is monotone in output. We also investigate a few possibilities of relaxing these requirements.

Keywords: Moral; hazard; Hidden; savings; First-order; approach; Log-convexity (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (36)

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Working Paper: On the First-Order Approach in Principal-Agent Models with Hidden Borrowing and Lending (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:4:p:1331-1361

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