A general solution method for moral hazard problems

Rongzhu KE, Christopher Thomas Ryan

Research output: Contribution to journalArticlepeer-review

5 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 - Sep 2018

Scopus Subject Areas

  • Economics, Econometrics and Finance(all)

User-Defined Keywords

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

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