A general solution method for moral hazard problems. Issue 3 (18th October 2018)

• Record Type: Journal Article
• Authors: Ke, Rongzhu; Ryan, Christopher Thomas
• Is Part Of: Theoretical economics. Volume 13:Issue 3(2018)
• Page Start: 1425
• Page End: 1481
• Publication Date: 2018-10-18
• Subjects: Principal–agent -- moral hazard -- solution method; D82 -- D86; Economics -- Periodicals; 330.01
• DOI: 10.3982/TE2167
• Languages: English
• ISSNs: 1933-6837

Abstract

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.