original papers: On the generalized principal-agent problem: Decomposition and existence results

Peter S. Faynzilberg () and Praveen Kumar
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Peter S. Faynzilberg: MEDS Department, J.L. Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208-2009, USA

Review of Economic Design, 2000, vol. 5, issue 1, 23-58

Abstract: This paper addresses the class of generalized agency problems: situations in which adverse selection and moral hazard are jointly present. We present a decomposition of the principal's optimization problem under the first-order approach that sheds light on the interactions between the two types of private information, and also significantly improves tractability. We use the decomposition to (1) provide examples of closed form solutions of the optimal contract, and (2) analyze the existence of optimal contracts. We also show that the first-order approach is valid in generalized agency problems if the production technology satisfies the linear distribution function condition (LDFC) in actions and types. For more general production technologies the Mirrlees-Rogerson sufficient conditions need to be extended to include restrictions on the form of the optimal contract.

Keywords: Generalized agency; moral hazard; adverse selection; separability; existence (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2000-04-18
Note: Received: 11 August 1997 / 26 September 1999
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Citations: View citations in EconPapers (12)

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