Existence and non-existence in the moral hazard problem

Sofia Moroni and Jeroen Swinkels

Journal of Economic Theory, 2014, vol. 150, issue C, 668-682

Abstract: We provide a new class of counter-examples to existence in a simple moral hazard problem in which the first-order approach is valid. In contrast to the Mirrlees example, unbounded likelihood ratios on the signal technology are not central. Rather, our examples center around the behavior of the utility function as utility diverges to negative infinity. For any utility function, such as ln(w), in which utility diverges to negative infinity at a finite wealth level, existence will fail for some specifications of the agentʼs cost of effort. When utility diverges to negative infinity only as wealth does as well, existence holds for all specifications of the agentʼs cost of effort if and only if the agent continues to dislike risk as wealth diverges to negative infinity. When there is a finite lower bound on utility, existence is assured. For those cases where existence fails, we characterize the limit of near optimal contracts.

Keywords: Moral hazard; Principal–agent models; Optimal contract; Existence; Mirrlees non-existence example (search for similar items in EconPapers)
JEL-codes: D86 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205311300166X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:150:y:2014:i:c:p:668-682

DOI: 10.1016/j.jet.2013.09.011

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().