In some pure moral hazard situations the principal can implement a first-best allocation using an incentive contract constructed on the basis of a first-best payment scheme. Such a contract relies on the possibility of discriminate actions according to the outcome by imposing a penalty whenever the observed outcome is lower than the admissible ones. The elimination of inefficient behavior depends basically on the outcome function, and we find that the fine is finite in the more interesting cases. The implementation of the first-best solution does not depend on the principal's risk neutrality. Nevertheless, when the principal is risk neutral, the ef f icient contract is dichotomous. Moreover, we prove that the efficient allocation can be reached through such a dichotomous payment scheme if and only if the principal is risk neutral for a certain range of returns.
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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number
1991-02.
Length: 31 pages Date of creation: Jan 1991 Date of revision: Publication status: Published by Ivie Handle: RePEc:ivi:wpasad:1991-02
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Luis Corchón & Bhaskar Chakravorti & Simon Wilkie, 1993.
"Credible Implementation,"
Working Papers. Serie AD
1993-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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Chakravorti, B. & Corchon, L.C., 1992.
"Credible Implementation,"
Papers
76, Bell Communications - Economic Research Group.