A Graphical Approach to the Standard Principal-Agent Model
AbstractAn obstacle to the teaching of principal-agent theory is the technical complexity and intractability of the general model. Even in academic studies strong assumptions are often imposed so as to derive an analytical solution. The author describes a graphical approach to the standard principal-agent model. Characterizing equilibrium in the contract space defined by the incentive parameter and insurance component of pay under a linear contract, this approach provides a simple and intuitive method for analyzing the principal-agent problem, which can be easily understood by students of economics with basic knowledge of algebra and differentiation. The approach has shown to be convenient and rich for comparative statics analyses.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal The Journal of Economic Education.
Volume (Year): 33 (2002)
Issue (Month): 3 (January)
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