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The Principal-Agent Relationship: Two Distributions Satisfying MLRP and CDFC

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  • Spaeter, S.

Abstract

The first-order approach, which consists in replacing the incentive compatible constraint by the agent's first order condition, is widely used in agency problems where the principal cannot observe the level of effort chosen by the agent. This substitution is valid with the Monotone Likelihood Ratio Property and the Convex Distribution Function Condition. Unfortunately, revenue distributions seldom present both properties. In this note, we provide two examples of revenue distributions that satisfy MLRP and CDFC. We also give their counterpart in terms of loss distribution.

Suggested Citation

  • Spaeter, S., 1998. "The Principal-Agent Relationship: Two Distributions Satisfying MLRP and CDFC," Ecole des Hautes Etudes Commerciales de Montreal- 98-11, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
  • Handle: RePEc:fth:etcori:98-11
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    Keywords

    INCOME DISTRIBUTION ; MORAL HAZARD ; PRODUCTIVITY;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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