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A general solution method for moral hazard problems

Author

Listed:
  • Ke, Rongzhu

    (Department of Economics, Hong Kong Baptist University)

  • Ryan, Christopher Thomas

    (Booth School of Business, University of Chicago)

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.

Suggested Citation

  • Ke, Rongzhu & Ryan, Christopher Thomas, 2018. "A general solution method for moral hazard problems," Theoretical Economics, Econometric Society, vol. 13(3), September.
    • Handle: RePEc:the:publsh:2167
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    Citations

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    Cited by:

    1. Zhaolin Li & Samuel N. Kirshner, 2021. "Salesforce Compensation and Two‐Sided Ambiguity: Robust Moral Hazard with Moment Information," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 2944-2961, September.
    2. Jean-Gabriel Lauzier, 2021. "Ex-post moral hazard and manipulation-proof contracts," Papers 2112.06811, arXiv.org.
    3. Chang Koo Chi & Kyoung Jin Choi, 2022. "A Dual Approach To Agency Problems: Existence," Working papers 2022rwp-197, Yonsei University, Yonsei Economics Research Institute.
    4. Bo Chen & Yu Chen & David Rietzke, 2020. "Simple contracts under observable and hidden actions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(4), pages 1023-1047, June.
    5. Rongzhu Ke & Xinyi Xu, 2023. "The existence of an optimal deterministic contract in moral hazard problems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(2), pages 375-416, August.
    6. Wang, Wenbin & Hu, Shanshan, 2021. "Moral hazard with limited liability: Random-variable formulation and optimal contract structures," Games and Economic Behavior, Elsevier, vol. 126(C), pages 374-386.
    7. Chi, Chang Koo & Choi, Kyoung Jin, 2023. "A dual approach to agency problems," Journal of Mathematical Economics, Elsevier, vol. 109(C).

    More about this item

    Keywords

    Principal agent; moral hazard; solution method;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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