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On the Range of Applicability of the First-order Approach to Agency Problems

Author

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  • Oscar Gutierrez

    (Universitat Autonoma de Barcelona)

Abstract

This note examines the range of applicability of the first-order approach to principal-agent problems under moral hazard. We show the existence of parameter configurations where the solution given by Holmstrom (1979)-Jewitt (1988) stops working to provide the second-best contract. The problem arises when the agent's reservation utility is below a certain threshold, which is associated with the fact that the contract lacks a fixed component.

Suggested Citation

  • Oscar Gutierrez, 2024. "On the Range of Applicability of the First-order Approach to Agency Problems," Annals of Economics and Finance, Society for AEF, vol. 25(2), pages 649-662, November.
    • Handle: RePEc:cuf:journl:y:2024:v:25:i:2:gutierrez
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    More about this item

    Keywords

    Moral Hazard; Principal-Agent Model; Second-Best Contract; First-Order Approach; Reservation Utility;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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