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: On the Notion of the First Best in Standard Hidden Action Problems

  • Christian Ewerhart
  • Christoph Nitzsche

It is well known that ex-ante randomization can improve upon second best contracts in principal-agent problems. In this note, we show that even the ¯rst{best can be dominated by a random contract. Our example is cast in a standard textbook set-up with two e®ort levels and two states of nature.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 229.

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Handle: RePEc:zur:iewwpx:229
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  1. Richard Arnott & Joseph E Stiglitz, 2010. "Randomization with Asymmetric Information," Levine's Working Paper Archive 2054, David K. Levine.
  2. Gjesdal, Froystein, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 373-90, July.
  3. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
  4. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  5. Roland Strausz, 2001. "Mitigating Non-Contractability with Interim Randomization," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(2), pages 231-, June.
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