Discrete-Time Formulation II

Jaeyoung Sung
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Jaeyoung Sung: Ajou University

Chapter Chapter 4 in Contract Theory: Discrete- and Continuous-Time Models, 2023, pp 41-62 from Springer

Abstract: Abstract We consider discrete-time models with production outcomes continuously distributed, and study them using the first-order approach. We learn that under moral hazard, the optimal contract decision is a tradeoff between the benefit of improving the agent’s work incentives and the cost of sacrificing the risk-sharing efficiency, and that the optimal performance metric for the optimal contract is a combination of the outcome and relevant signals which can together constitute a ‘sufficient statistic’ for the agent’s private effort. We discuss the Mirrlees Unpleasant Theorem which highlights limitations of the first-order approach to discrete-time models particularly with normally distributed outcomes.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-99-5487-2_4

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DOI: 10.1007/978-981-99-5487-2_4

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