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Threat-Based Implementation of Incentive Compatible Mechanisms

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  • Liang Zou

Abstract

We investigate necessary and sufficient conditions for threat-based incentive mechanisms (TBIMs), an extension of the Mirrlees's schemes, to approximately eliminate moral hazard in a principal-agent relationship with both problems of moral hazard and adverse selection. Assuming normal distributions of output, a necessary condition is that the agent's type and effort do not affect the variance of the distribution. Sufficient conditions on the likelihood ratio of the distributions appear to be stronger than those used in the pure adverse-selection models, and have their particular implications.

Suggested Citation

  • Liang Zou, 1992. "Threat-Based Implementation of Incentive Compatible Mechanisms," Annals of Economics and Statistics, GENES, issue 25-26, pages 189-204.
    • Handle: RePEc:adr:anecst:y:1992:i:25-26:p:189-204
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    File URL: http://www.jstor.org/stable/20075863
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    1. Osband, Kent, 1987. "Speak softly, but carry a big stick: On optimal targets under moral hazard," Journal of Comparative Economics, Elsevier, vol. 11(4), pages 584-595, December.
    2. Zou, Liang, 1992. "Threat-based incentive mechanisms under moral hazard and adverse selection," Journal of Comparative Economics, Elsevier, vol. 16(1), pages 47-74, March.
    3. Zou, L., 1991. "The target-incentive system vs. the price-incentive system under adverse selection and the ratchet effect," Other publications TiSEM fd7efcb1-2cf3-42e0-b6a4-f, Tilburg University, School of Economics and Management.
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    10. ZOU, Liang, 1992. "Threat-based incentive mechanisms under moral hazard and adverse selection," LIDAM Reprints CORE 979, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Cited by:

    1. Philippe Bontems & Jean-Marc Bourgeon, 1996. "Régulation par la production ou par l'intrant en présence d'incertitude," Annals of Economics and Statistics, GENES, issue 43, pages 181-193.

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