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: On the Notion of the First Best in Standard Hidden Action Problems

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Author Info
Christian Ewerhart
Christoph Nitzsche
Abstract

It is well known that ex-ante randomization can improve upon second best contracts in principal-agent problems. In this note, we show that even the ¯rst{best can be dominated by a random contract. Our example is cast in a standard textbook set-up with two e®ort levels and two states of nature.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp229.

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Handle: RePEc:zur:iewwpx:229

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Keywords: Hidden action; ¯rst{best; ex-ante randomization;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May. [Downloadable!] (restricted)
  2. Richard J. Arnott & Joseph E. Stiglitz, 1988. "Randomization with Asymmetric Information," NBER Working Papers 2507, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring. [Downloadable!] (restricted)
  4. Gjesdal, Froystein, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Blackwell Publishing, vol. 49(3), pages 373-90, July. [Downloadable!] (restricted)
  5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  6. Roland Strausz, 2001. "Mitigating Non-Contractability with Interim Randomization," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(2), pages 231-, June. [Downloadable!] (restricted)
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  1. Peter Woehrmann & Willi Semmler & Martin Lettau, . "Nonparametric Estimation of the Time-varying Sharpe Ratio in Dynamic Asset Pricing Models," IEW - Working Papers iewwp225, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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