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The Mirrlees-Problem Revisited

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  • Müller, Holger M.

    (Department of Economics, University of Mannheim)

Abstract

Optimal incentive schemes need not be complicated. In a hidden action model with lognormally distributed output, Mirrlees (1974) shows that the first-best outcome can be approached arbitrarily closely by a suitably chosen sequence of step functions. The present paper shows that this result extends to any probability distributiuon that satisfies two conditions: 1) a convexity condition which ensures that the first-order approach is valid, and 2) a likelihood ratio condition which implies that low output values are a reliable signal that the agent has shirked. Both conditions are met by the normal, lognormal, gamma, beta, chi-squared, Weibull, t-, and F-distribution.

Suggested Citation

  • Müller, Holger M., 1997. "The Mirrlees-Problem Revisited," Sonderforschungsbereich 504 Publications 97-43, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:97-43
    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    File URL: http://www.sfb504.uni-mannheim.de/publications/dp97-43.pdf
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