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An Analysis of the Principal-Agent Problem

Sanford Grossman and Oliver Hart

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent’s utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative procedure. If the agent’s utility function is separable in action and reward, we show that the op-timal way of implementing an action by the agent can be found by solving a convex programming problem. We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.

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Working Paper: An Analysis of the Principal-Agent Problem (2001) Downloads
Journal Article: An Analysis of the Principal-Agent Problem (1983) Downloads
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