Open AccessA general solution method for moral hazard problems
Author(s) -
Ke Rongzhu,
Ryan Christopher Thomas
Publication year - 2018
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te2167
Subject(s) - moral hazard , mathematical economics , computer science , mathematics , mathematical optimization , economics , microeconomics , incentive
Principal–agent models are pervasive in theoretical and applied economics, but their analysis has largely been limited to the “first‐order approach” (FOA), where incentive compatibility is replaced by a first‐order condition. This paper presents a new approach to solving a wide class of principal–agent problems that satisfy the monotone likelihood ratio property but may fail to meet the requirements of the FOA. Our approach solves the problem via tackling a max‐min‐max formulation over agent actions, alternate best responses by the agent, and contracts.