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A general principal-agent setting with non-differentiable mechanisms: Some examples

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  • Ruiz del Portal, X.

Abstract

A procedure for dealing with monotonicity constraints in optimal control problems is used, within the context of a general model on incentive provision with hidden characteristics, to extend the space of contracts considered in principal-agent theory and thus generalize its results. We conclude that most findings, obtained under assumptions of continuity and piecewise differentiability with respect to the decision variable of the problem, remain valid after replacing such assumptions with two minimal requirements. Examples on monopoly with product quality, countervailing incentives and optimal taxation are also provided to illustrate various sources of non-smoothness in the model, and confirm the adequacy of our methods for deriving the sort of characterization that prevails under the standard conditions of continuity and piecewise differentiability.

Suggested Citation

  • Ruiz del Portal, X., 2009. "A general principal-agent setting with non-differentiable mechanisms: Some examples," Mathematical Social Sciences, Elsevier, vol. 57(2), pages 262-278, March.
  • Handle: RePEc:eee:matsoc:v:57:y:2009:i:2:p:262-278
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    References listed on IDEAS

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    12. X. RUIZ del PORTAL, 2007. "The Problem of Optimum Income Taxation: A Remark on Its Monotonicity Constraint," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 265-283, April.
    13. Laffont, Jean-Jacques, 2001. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780199248681.
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