The Mirrlees-Problem Revisited

Holger M. Müller ()
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Holger M. Müller: Department of Economics, University of Mannheim, Postal: A5, Room A237, 68131 Mannheim, Germany

No 97-43, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Optimal incentive schemes need not be complicated. In a hidden action model with lognormally distributed output, Mirrlees (1974) shows that the first-best outcome can be approached arbitrarily closely by a suitably chosen sequence of step functions. The present paper shows that this result extends to any probability distributiuon that satisfies two conditions: 1) a convexity condition which ensures that the first-order approach is valid, and 2) a likelihood ratio condition which implies that low output values are a reliable signal that the agent has shirked. Both conditions are met by the normal, lognormal, gamma, beta, chi-squared, Weibull, t-, and F-distribution.

Pages: 17 pages
Date: 1997-12-19
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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