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Existence of Optimal Mechanisms in Principal-Agent Problems

Philip Reny (), Jeroen Swinkels and Ohad Kadan
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Jeroen Swinkels: Northwestern University
Ohad Kadan: Olin Business School

No 2011-002, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We provide general conditions under which principal-agent problems admit mechanisms that are optimal for the principal. Our result covers as special cases those in which the agent has no private information –i.e., pure moral hazard –as well as those in which the agent’s only action is a participation decision – i.e., pure adverse selection. We allow multi-dimensional actions and signals, as well as both …nancial and non-…nancial rewards. Beyond measurability, we require no a priori restrictions on the space of mechanisms. Consequently, our optimal mechanisms are optimal among all measurable mechanisms. A key to obtaining our result is to permit randomized mechanisms. We also provide conditions under which randomization is unnecessary.

New Economics Papers: this item is included in nep-cta and nep-mic
Date: 2011
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