A general solution method for moral hazard problems

Rongzhu KE, Christopher Thomas Ryan

    Research output: Contribution to journalJournal articlepeer-review

    7 Citations (Scopus)

    Abstract

    Principal–agent models are pervasive in theoretical and applied economics, but their analysis has largely been limited to the “first-order approach” (FOA), where incentive compatibility is replaced by a first-order condition. This paper presents a new approach to solving a wide class of principal–agent problems that satisfy the monotone likelihood ratio property but may fail to meet the requirements of the FOA. Our approach solves the problem via tackling a max-min-max formulation over agent actions, alternate best responses by the agent, and contracts.

    Original languageEnglish
    Pages (from-to)1425-1481
    Number of pages57
    JournalTheoretical Economics
    Volume13
    Issue number3
    DOIs
    Publication statusPublished - Sept 2018

    Scopus Subject Areas

    • Economics, Econometrics and Finance(all)

    User-Defined Keywords

    • D82
    • D86
    • moral hazard
    • Principal–agent
    • solution method

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