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A convex mapping for the first order approach: A note

Author

Listed:
  • Corrado Benassi

    (Dipartimento di Scienze Economiche, Alma Mater Studiorum Università di Bologna)

  • Alessandra Chirco

    (Dipartimento di Scienze dell'economia, Università del Salento)

Abstract

The first order approach to solving the standard one-dimensional principal-agent model is conditional upon the relevant stochastic production function obeying two noteworthy restrictions: that the Likelihood Ratio be monotonically increasing in output, and that the distribution function be convex in effort. It is usually claimed that such conditions are very restrictive, as very few of the standard probability distributions satisfy both properties. The purpose of this note is to show that some simple transformations or parametrizations are available, that enable one to work out convenient distributions with the required properties

Suggested Citation

  • Corrado Benassi & Alessandra Chirco, 2024. "A convex mapping for the first order approach: A note," Economics Bulletin, AccessEcon, vol. 44(2), pages 698-706.
    • Handle: RePEc:ebl:ecbull:eb-23-00545
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    More about this item

    Keywords

    principal-agent problem; first order approach;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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