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Discrete-Time Formulation II

In: Contract Theory: Discrete- and Continuous-Time Models

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  • Jaeyoung Sung

    (Ajou University)

Abstract

We consider discrete-time models with production outcomes continuously distributed, and study them using the first-order approach. We learn that under moral hazard, the optimal contract decision is a tradeoff between the benefit of improving the agent’s work incentives and the cost of sacrificing the risk-sharing efficiency, and that the optimal performance metric for the optimal contract is a combination of the outcome and relevant signals which can together constitute a ‘sufficient statistic’ for the agent’s private effort. We discuss the Mirrlees Unpleasant Theorem which highlights limitations of the first-order approach to discrete-time models particularly with normally distributed outcomes.

Suggested Citation

  • Jaeyoung Sung, 2023. "Discrete-Time Formulation II," Springer Books, in: Contract Theory: Discrete- and Continuous-Time Models, chapter 0, pages 41-62, Springer.
    • Handle: RePEc:spr:sprchp:978-981-99-5487-2_4
    DOI: 10.1007/978-981-99-5487-2_4
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