A general solution method for moral hazard problems

Rongzhu Ke and Christopher Thomas Ryan ()
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Christopher Thomas Ryan: Booth School of Business, University of Chicago

Theoretical Economics, 2018, vol. 13, issue 3

Abstract: Principal-agent models are pervasive in theoretical and applied economics, but their analysis has largely been limited to the ``first-order approach'' (FOA) where incentive compatibility is replaced by a first-order condition. This paper presents a new approach to solving a wide class of principal-agent problems that satisfy the monotone likelihood ratio property but may fail to meet the requirements of the FOA. Our approach solves the problem via tackling a max-min-max formulation over agent actions, alternate best responses by the agent, and contracts.

Keywords: Principal agent; moral hazard; solution method (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2018-10-04
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Citations: View citations in EconPapers (7)

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