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Optimal deterministic contracting mechanisms for principal-agent problems with moral hazard and adverse selection

Author

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  • Frank H. Page Jr.

    (Department of Finance, University of Alabama, Tuscaloosa, AL 35487, USA)

Abstract

For the principal-agent problem with moral hazard and adverse selection we establish that within the collection of all measurable, deterministic contracting mechanisms satisfying the individual rationality and incentive compatibility constraints there exists one that is optimal for a risk averse principal contracting with a risk averse agent. In addition to demonstrating existence, one of the main contributions of the paper is to show that, in general, centralized contracting implemented via a contracting mechanism is equivalent to delegated contracting implemented via a contract menu. Thus, contracting can always be delegated to the agent without gain or loss to the principal. Based on this result, the existence of an optimal contracting mechanism for the principal-agent problem is established by showing that there exists an optimal contract menu for the equivalent delegated contracting problem.

Suggested Citation

  • Frank H. Page Jr., 1997. "Optimal deterministic contracting mechanisms for principal-agent problems with moral hazard and adverse selection," Review of Economic Design, Springer;Society for Economic Design, vol. 3(1), pages 1-13.
    • Handle: RePEc:spr:reecde:v:3:y:1997:i:1:p:1-13
    Note: Received: 7 October 1994 / Accepted: 14 January 1997
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    Citations

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    Cited by:

    1. Gong, Rui & He, Jieshuang & Page, Frank, 2016. "Incentive compatible networks and the delegated networking principle," LSE Research Online Documents on Economics 66045, London School of Economics and Political Science, LSE Library.
    2. Basov Suren & Yin Xiangkang, 2010. "Optimal Screening by Risk-Averse Principals," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-25, March.
    3. Julio Backhoff-Veraguas & Patrick Beissner & Ulrich Horst, 2022. "Robust contracting in general contract spaces," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(4), pages 917-945, June.

    More about this item

    Keywords

    Moral hazard; adverse selection; incentive compatibility; agency problem;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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