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A unifying approach to incentive compatibility in moral hazard problems

Author

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  • Kirkegaard, René

    (Department of Economics and Finance, University of Guelph)

Abstract

A new approach to moral hazard is presented. Once local incentive compatibility is satisfied, the problem of verifying global incentive compatibility is shown to be isomorphic to the problem of comparing two classes of distribution functions. Thus, tools from choice under uncertainty can be brought to bear to the problem. The approach allows classic justifications of the first-order approach (FOA) to be proven using the same unifying methodology. However, the approach is especially useful for analyzing higher-dimensional moral hazard problems. New and more tractable multi-signal justifications of the FOA are derived and implications for optimal monitoring are examined. The approach yields justifications of the FOA in certain settings where the action is multi-dimensional, as in the case when the agent is multi-tasking. Finally, a tractable multi-tasking model with richer predictions than the popular but simple linear-exponential-normal model is presented.

Suggested Citation

  • Kirkegaard, René, 2017. "A unifying approach to incentive compatibility in moral hazard problems," Theoretical Economics, Econometric Society, vol. 12(1), January.
  • Handle: RePEc:the:publsh:2008
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    References listed on IDEAS

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    Cited by:

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    3. René Kirkegaard, 2020. "Contracting with private rewards," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 589-612, June.
    4. Drugov, Mikhail & Ryvkin, Dmitry, 2020. "Tournament rewards and heavy tails," Journal of Economic Theory, Elsevier, vol. 190(C).
    5. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    6. Chi, Chang Koo & Olsen, Trond E., 2018. "Relational Incentive Contracts and Performance Measurement," Discussion Paper Series in Economics 7/2018, Norwegian School of Economics, Department of Economics.
    7. Yuntong Wang, 2014. "Envelope Theorem without Differentiability," Working Papers 1404, University of Windsor, Department of Economics.
    8. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2019. "The informativeness principle without the first-order approach," Games and Economic Behavior, Elsevier, vol. 113(C), pages 743-755.
    9. René Kirkegaard, 2020. "Microfounded Contest Design," Working Papers 2003, University of Guelph, Department of Economics and Finance.
    10. 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.

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    More about this item

    Keywords

    First-order approach; moral hazard; multi-tasking; orthant orders; principal-agent models; stochastic orders;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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