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Existence of Optimal Mechanisms in Principal-Agent Problems

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  • Ohad Kadan

    ()
    (Washington University in St. Louis - Olin School of Business)

  • Philip J. Reny

    ()
    (University of Chicago - Department of Economics)

  • Jeroen Swinkels

    ()
    (Northwestern University - Kellogg School of Management)

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    Abstract

    We provide general conditions under which principal-agent problems admit mechanisms that are optimal for the principal. Our result covers as special cases those in which the agent has no private information –i.e., pure moral hazard –as well as those in which the agent’s only action is a participation decision – i.e., pure adverse selection. We allow multi-dimensional actions and signals, as well as both …nancial and non-…nancial rewards. Beyond measurability, we require no a priori restrictions on the space of mechanisms. Consequently, our optimal mechanisms are optimal among all measurable mechanisms. A key to obtaining our result is to permit randomized mechanisms. We also provide conditions under which randomization is unnecessary.

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    File URL: http://bfi.uchicago.edu/RePEc/bfi/wpaper/BFI_2011-002.pdf
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    Bibliographic Info

    Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2011-002.

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    Date of creation: Jan 2011
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    Handle: RePEc:bfi:wpaper:2011-002

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    1. Sinclair-Desgagne, Bernard, 1994. "The First-Order Approach to Multi-signal Principal-Agent Problems," Econometrica, Econometric Society, vol. 62(2), pages 459-66, March.
    2. John R. Conlon, 2009. "Two New Conditions Supporting the First-Order Approach to Multisignal Principal-Agent Problems," Econometrica, Econometric Society, vol. 77(1), pages 249-278, 01.
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    Cited by:
    1. Martimort, David & Stole, Lars, 2012. "Representing equilibrium aggregates in aggregate games with applications to common agency," Games and Economic Behavior, Elsevier, vol. 76(2), pages 753-772.

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