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original papers : On the generalized principal-agent problem: Decomposition and existence results

Author

Listed:
  • Peter S. Faynzilberg

    (MEDS Department, J.L. Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208-2009, USA)

  • Praveen Kumar

    (College of Business Administration, University of Houston, Houston, TX 77204-6282, USA)

Abstract

This paper addresses the class of generalized agency problems: situations in which adverse selection and moral hazard are jointly present. We present a decomposition of the principal's optimization problem under the first-order approach that sheds light on the interactions between the two types of private information, and also significantly improves tractability. We use the decomposition to (1) provide examples of closed form solutions of the optimal contract, and (2) analyze the existence of optimal contracts. We also show that the first-order approach is valid in generalized agency problems if the production technology satisfies the linear distribution function condition (LDFC) in actions and types. For more general production technologies the Mirrlees-Rogerson sufficient conditions need to be extended to include restrictions on the form of the optimal contract.

Suggested Citation

  • Peter S. Faynzilberg & Praveen Kumar, 2000. "original papers : On the generalized principal-agent problem: Decomposition and existence results," Review of Economic Design, Springer;Society for Economic Design, vol. 5(1), pages 23-58.
    • Handle: RePEc:spr:reecde:v:5:y:2000:i:1:p:23-58
    Note: Received: 11 August 1997 / 26 September 1999
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    Citations

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    Cited by:

    1. Felipe Balmaceda, 2020. "Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 601-637, June.
    2. Jaeyoung Sung, 2005. "Optimal Contracts Under Adverse Selection and Moral Hazard: A Continuous-Time Approach," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 1021-1073.
    3. Nicol'as Hern'andez Santib'a~nez & Dylan Possamai & Chao Zhou, 2017. "Bank monitoring incentives under moral hazard and adverse selection," Papers 1701.05864, arXiv.org, revised Jan 2019.
    4. Robert J. Gary-Bobo & Alain Trannoy, 2015. "Optimal student loans and graduate tax under moral hazard and adverse selection," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 546-576, September.
    5. Fosco, C. & Mengel, F., 2008. "Incentives and informal networks," Research Memorandum 022, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    6. Lionel Thomas, 2016. "The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent," Working Papers hal-01374709, HAL.
    7. Nicolás Hernández Santibáñez & Dylan Possamaï & Chao Zhou, 2017. "Bank monitoring incentives under moral hazard and adverse selection," Working Papers hal-01435460, HAL.
    8. Sandrine Ollier, 2006. "Un effet pervers de la responsabilité limitée," Recherches économiques de Louvain, De Boeck Université, vol. 72(3), pages 265-286.
    9. Sandrine Ollier, 2007. "On the generalized principal-agent problem: a comment," Post-Print hal-00447191, HAL.
    10. Lionel Thomas, 2016. "The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent," Working Papers 2016-09, CRESE.

    More about this item

    Keywords

    Generalized agency; moral hazard; adverse selection; separability; existence;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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