Existence of Optimal Mechanisms in Principal-Agent Problems

Ohad Kadan, Philip J. Reny, Jeroen M Swinkels

Research output: Working paper

Abstract

We provide general conditions under which principal-agent problems admit mechanisms that are optimal for the principal. Our result covers as special cases pure moral hazard and pure adverse selection. We allow multi-dimensional types, actions, and signals, as well as both financial and non-financial rewards. Our results extend to situations in which there are ex-ante or interim restrictions on the mechanism, and allows the principal to have decisions in addition to choosing the agent's contract. Beyond measurability, we require no a priori restrictions on the space of mechanisms. It is not unusual for randomization to be necessary for optimality and so it (should be and) is permitted. Randomization also plays an essential role in our proof. We also provide conditions under which some forms of randomization are unnecessary.
Original languageEnglish (US)
Number of pages41
StatePublished - Feb 2014

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