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A general principal-agent setting with non-differentiable mechanisms: Some examples

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  • Ruiz del Portal, X.

Abstract

A procedure for dealing with monotonicity constraints in optimal control problems is used, within the context of a general model on incentive provision with hidden characteristics, to extend the space of contracts considered in principal-agent theory and thus generalize its results. We conclude that most findings, obtained under assumptions of continuity and piecewise differentiability with respect to the decision variable of the problem, remain valid after replacing such assumptions with two minimal requirements. Examples on monopoly with product quality, countervailing incentives and optimal taxation are also provided to illustrate various sources of non-smoothness in the model, and confirm the adequacy of our methods for deriving the sort of characterization that prevails under the standard conditions of continuity and piecewise differentiability.

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Bibliographic Info

Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 57 (2009)
Issue (Month): 2 (March)
Pages: 262-278

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Handle: RePEc:eee:matsoc:v:57:y:2009:i:2:p:262-278

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Web page: http://www.elsevier.com/locate/inca/505565

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Keywords: Agency problems Contract theory Countervailing incentives Monotonicity constraints Monopoly with product quality Non-differentiable solutions Optimum income taxation;

References

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  1. Laffont, Jean-Jacques, 2000. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780198294245, September.
  2. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  3. Georg Nöldeke & Larry Samuelson, 2006. "Optimal Bunching without Optimal Control," Working papers 2006/12, Faculty of Business and Economics - University of Basel.
  4. X. RUIZ del PORTAL, 2007. "The Problem of Optimum Income Taxation: A Remark on Its Monotonicity Constraint," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 265-283, 04.
  5. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
  6. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  7. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  8. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Spence, Michael, 1977. "Nonlinear prices and welfare," Journal of Public Economics, Elsevier, vol. 8(1), pages 1-18, August.
  10. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
  11. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  12. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  13. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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