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The Principal-Agent Relationship: Two Distributions Satisfying MLRP and CDFC

S. Spaeter

Ecole des Hautes Etudes Commerciales de Montreal- from Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques.

Abstract: The first-order approach, which consists in replacing the incentive compatible constraint by the agent's first order condition, is widely used in agency problems where the principal cannot observe the level of effort chosen by the agent. This substitution is valid with the Monotone Likelihood Ratio Property and the Convex Distribution Function Condition. Unfortunately, revenue distributions seldom present both properties. In this note, we provide two examples of revenue distributions that satisfy MLRP and CDFC. We also give their counterpart in terms of loss distribution.

Keywords: INCOME DISTRIBUTION; MORAL HAZARD; PRODUCTIVITY (search for similar items in EconPapers)
JEL-codes: D24 J31 M12 D82 (search for similar items in EconPapers)
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:fth:etcori:98-11

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