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A dual approach to agency problems

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  • Chi, Chang Koo
  • Choi, Kyoung Jin

Abstract

This paper presents a dual approach to the standard model of moral hazard. We formulate the dual of the principal–agent problem under the assumption that the incentive constraint can be replaced by a local constraint (the first-order approach), to examine whether the relaxed agency problem yields a candidate solution. The dual formulation generates a convex conjugate, which transforms the agent’s utility from compensation into a dual functional. The dual problem features a simple convex structure, which enables us to perform a comprehensive analysis for the agency problem. We derive novel and more tractable conditions for existence and uniqueness of a solution to the problem with the dual elements. Furthermore, the approach to the dual problem provides illuminating insights into the previous nonexistence results.

Suggested Citation

  • Chi, Chang Koo & Choi, Kyoung Jin, 2023. "A dual approach to agency problems," Journal of Mathematical Economics, Elsevier, vol. 109(C).
    • Handle: RePEc:eee:mateco:v:109:y:2023:i:c:s0304406823001027
    DOI: 10.1016/j.jmateco.2023.102909
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