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Two New Conditions Supporting the First-Order Approach to Multisignal Principal-Agent Problems

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  • John R. Conlon

Abstract

This paper presents simple new multisignal generalizations of the two classic methods used to justify the first-order approach to moral hazard principal-agent problems, and compares these two approaches with each other. The paper first discusses limitations of previous generalizations. Then a state-space formulation is used to obtain a new multisignal generalization of the Jewitt (1988) conditions. Next, using the Mirrlees formulation, new multisignal generalizations of the convexity of the distribution function condition (CDFC) approach of Rogerson (1985) and Sinclair-Desgagné (1994) are obtained. Vector calculus methods are used to derive easy-to-check local conditions for our generalization of the CDFC. Finally, we argue that the Jewitt conditions may generalize more flexibly than the CDFC to the multisignal case. This is because, with many signals, the principal can become very well informed about the agent's action and, even in the one-signal case, the CDFC must fail when the signal becomes very accurate. Copyright 2009 The Econometric Society.

Suggested Citation

  • 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, January.
  • Handle: RePEc:ecm:emetrp:v:77:y:2009:i:1:p:249-278
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    File URL: http://hdl.handle.net/10.3982/ECTA6688
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    Cited by:

    1. Pierre Chaigneau & Alex Edmans & Daniel Gottlieb, 2014. "The Generalized Informativeness Principle," NBER Working Papers 20729, National Bureau of Economic Research, Inc.
    2. Fagart, Marie-Cécile & Fluet, Claude, 2013. "The first-order approach when the cost of effort is money," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 7-16.
    3. Luigi Iovino, 2012. "Sophisticated Intermediation and Aggregate Volatility," 2012 Meeting Papers 965, Society for Economic Dynamics.
    4. Ábrahám, Árpád & Koehne, Sebastian & Pavoni, Nicola, 2011. "On the first-order approach in principal-agent models with hidden borrowing and lending," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1331-1361, July.
    5. Nasri, Mostafa & Bastin, Fabian & Marcotte, Patrice, 2015. "Quantifying the social welfare loss in moral hazard models," European Journal of Operational Research, Elsevier, vol. 245(1), pages 226-235.
    6. Clausen, Andrew, 2013. "Moral Hazard with Counterfeit Signals," SIRE Discussion Papers 2013-13, Scottish Institute for Research in Economics (SIRE).
    7. Guillaume Roger, 2016. "A Revelation Mechanism for Soft Information under Moral Hazard," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(5), pages 752-763, October.
    8. Guillaume Roger, 2013. "Optimal Contract under Moral Hazard with Soft Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 55-80, November.
    9. Jung, Jin Yong & Kim, Son Ku, 2015. "Information space conditions for the first-order approach in agency problems," Journal of Economic Theory, Elsevier, vol. 160(C), pages 243-279.
    10. Chi, Chang Koo & Olsen, Trond E., 2018. "Relational Incentive Contracts and Performance Measurement," Discussion Papers 2018/6, Norwegian School of Economics, Department of Business and Management Science.
    11. Ewerhart, Christian, 2016. "An envelope approach to tournament design," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 1-9.
    12. Jia xie, 2015. "Information, Risk Sharing and Incentives in Agency Problems," Staff Working Papers 15-7, Bank of Canada.
    13. Kadan, Ohad & Swinkels, Jeroen M., 2013. "On the moral hazard problem without the first-order approach," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2313-2343.
    14. repec:eee:ejores:v:264:y:2018:i:1:p:239-256 is not listed on IDEAS
    15. Philip J. Reny & Jeroen Swinkels & Ohad Kadan, 2011. "Existence of Optimal Mechanisms in Principal-Agent Problems," Working Papers 2011-002, Becker Friedman Institute for Research In Economics.
    16. Ethan Ligon & Pierre Dubois, 2012. "Incentives & Nutrition for Rotten Kids: The Quantity & Quality of Food Allocated within Philippine Households," 2012 Meeting Papers 375, Society for Economic Dynamics.
    17. Huang, Pidong, 2013. "Optimal Unemployment Insurance With Different Types of Job," MPRA Paper 46626, University Library of Munich, Germany.
    18. Fleckinger, Pierre, 2012. "Correlation and relative performance evaluation," Journal of Economic Theory, Elsevier, vol. 147(1), pages 93-117.
    19. Dominique Henriet & Patrick Pintus & Alain Trannoy, 2014. "Is the Flat Tax Optimal under Income Risk?," AMSE Working Papers 1420, Aix-Marseille School of Economics, Marseille, France, revised 30 May 2014.
    20. Hwang, Sunjoo, 2016. "Relational contracts and the first-order approach," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 126-130.
    21. Balmaceda, Felipe & Balseiro, Santiago R. & Correa, José R. & Stier-Moses, Nicolás E., 2016. "Bounds on the welfare loss from moral hazard with limited liability," Games and Economic Behavior, Elsevier, vol. 95(C), pages 137-155.
    22. Kirkegaard, René, 2017. "Moral hazard and the spanning condition without the first-order approach," Games and Economic Behavior, Elsevier, vol. 102(C), pages 373-387.
    23. Rene Kirkegaard, 2015. "Contracting with Private Rewards," Working Papers 1504, University of Guelph, Department of Economics and Finance.
    24. Kirkegaard, René, 2017. "A unifying approach to incentive compatibility in moral hazard problems," Theoretical Economics, Econometric Society, vol. 12(1), January.

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