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Deterministic versus Stochastic Mechanisms in Principal--Agent Models

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  • Roland Strausz

    (Free University of Berlin, Department of Economics)

Abstract

This paper shows that, contrary to what is generally believed, decreasing concavity of the agent's utility function with respect to the screening variable is not sufficient to ensure that stochastic mechanisms are suboptimal. The paper demonstrates, however, that they are suboptimal whenever the optimal deterministic mechanism exhibits no bunching. This is the case for most applications of the theory and therefore validates the literature's usual focus on deterministic mechanisms.

Suggested Citation

  • Roland Strausz, "undated". "Deterministic versus Stochastic Mechanisms in Principal--Agent Models," Papers 020, Departmental Working Papers.
    • Handle: RePEc:bef:lsbest:020
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    File URL: http://userpage.fu-berlin.de/%7Elsbester/papers/stoch.pdf
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    References listed on IDEAS

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    1. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
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    9. Page, F H, Jr, 1991. "Optimal Contract Mechanisms for Principal-Agent Problems with Moral Hazard and Adverse Selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(4), pages 323-338, October.
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    More about this item

    Keywords

    principal-agent theory; mechanism design; deterministic mechanisms; randomization.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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