The First-Order Approach when the Cost of Effort is Money

Marie-Cecile Fagart and Claude Fluet

Cahiers de recherche from CIRPEE

Abstract: We provide sufficient conditions for the first-order approach in the principal-agent problem when the agent’s utility has the non-separable form u(y - c(a)) where y is the contractual payoff and c(a) is the money cost of effort. We first consider a decision-maker facing prospects which cost c(a) with distributions of returns y that depends on a. The decision problem is shown to be concave if the primitive of the cumulative distribution of returns is a convex function, a condition we call Concavity of the Cumulative Quantile (CCQ). Next we apply CCQ to the distribution of outcomes (or their likelihood-ratio transforms) in the principal-agent problem and derive restrictions on the utility function that validate the first-order approach. We also discuss a stronger condition, log-convexity of the distribution, and show that it allows binding limited liability constraints, which CCQ does not.

Keywords: Principal-agent models; moral hazard; stochastic decision problem; quantile function; information systems (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cta, nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-20.pdf (application/pdf)

Related works:
Journal Article: The first-order approach when the cost of effort is money (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1220

Access Statistics for this paper

More papers in Cahiers de recherche from CIRPEE Contact information at EDIRC.
Bibliographic data for series maintained by Manuel Paradis ().