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Modelling countervailing incentives in adverse selection models: A synthesis

Listed author(s):
  • Aguirre, Iñaki
  • Beitia, Arantza

This paper is concerned with countervailing incentives in the adverse selection problems that typically arise in principal-agent relationships when the agent has private information. These incentives are present when the agent is tempted to either overstate or understate his private information depending upon the specific realization of his type. These problems were first analyzed by Lewis and Sappington (1989) and have been characterized and extended by Maggi and Rodríguez-Clare (1995a) and Jullien (2000). In this paper we propose a simple method of characterizing countervailing incentives in which the key element is the analysis of the properties of the full information problem. Our method for solving the principal problem, once identified the presence of countervailing incentives, follows closely the Baron’s (1989) approach, which does not require using optimal control theory. The methodology we present can be easily applied to many different economic settings. For example, in health economics, an insurer (or a hospital manager) might act as a principal and a physician as an agent. In labor settings, an employer may play the role of principal and a worker may act as the agent. In regulated industries, the regulatory agency might act as a principal designing incentive schemes for firms (the agents). In environmental regulation or resource exploitation, the principal might be an international agency dealing with national governments or firms.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999317300755
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 62 (2017)
Issue (Month): C ()
Pages: 82-89

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Handle: RePEc:eee:ecmode:v:62:y:2017:i:c:p:82-89
DOI: 10.1016/j.econmod.2017.01.007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Philippe Choné & Ching-To Albert Ma, 2011. "Optimal Health Care Contract under Physician Agency," Annals of Economics and Statistics, GENES, issue 101-102, pages 229-256.
  2. repec:adr:anecst:y:2011:i:101-102 is not listed on IDEAS
  3. Tracy R. Lewis & David E.M. Sappington, 1988. "Regulating a Monopolist with Unknown Demand and Cost Functions," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 438-457, Autumn.
  4. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
  5. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  6. Giovanni Maggi & Andres Rodriguez-Clare, 1995. "Costly Distortion of Information in Agency Problems," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 675-689, Winter.
  7. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
  8. Sheriff, Glenn, 2008. "Optimal environmental regulation of politically influential sectors with asymmetric information," Journal of Environmental Economics and Management, Elsevier, vol. 55(1), pages 72-89, January.
  9. Lewis, Tracy R & Sappington, David E M, 1988. "Regulating a Monopolist with Unknown Demand," American Economic Review, American Economic Association, vol. 78(5), pages 986-998, December.
  10. Laffont, Jean-Jacques & Tirole, Jean, 1990. "The regulation of multiproduct firms : Part I: Theory," Journal of Public Economics, Elsevier, vol. 43(1), pages 1-36, October.
  11. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
  12. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
  13. Laffont, Jean-Jacques & Tirole, Jean, 1990. "The regulation of multiproduct firms : Part II: Applications to competitive environments and policy analysis," Journal of Public Economics, Elsevier, vol. 43(1), pages 37-66, October.
  14. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  15. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  16. Partha Dasgupta & Peter Hammond & Eric Maskin, 1979. "The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility," Review of Economic Studies, Oxford University Press, vol. 46(2), pages 185-216.
  17. Araujo, Aloisio & Moreira, Humberto, 2010. "Adverse selection problems without the Spence-Mirrlees condition," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1113-1141, May.
  18. repec:adr:anecst:y:2011:i:101-102:p:11 is not listed on IDEAS
  19. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  20. Iñaki Aguirre & Arantza Beitia, 2008. "Regulating a Multiproduct Monopolist with Unknown Demand: Cross-Subsidization and Countervailing Incentives," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 652-675, December.
  21. Szalay, Dezsö, 2013. "Regulating a multiproduct and multitype monopolist," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 397, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  22. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
  23. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  24. li, Hong & Mu, Congming & Yang, Jinqiang, 2016. "Optimal contract theory with time-inconsistent preferences," Economic Modelling, Elsevier, vol. 52(PB), pages 519-530.
  25. Iñaki Aguirre & Arantza Beitia, 2004. "Regulating a Monopolist with Unknown Demand: Costly Public Funds and the Value of Private Information," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(5), pages 693-706, December.
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