On the moral hazard problem without the first-order approach

Ohad Kadan*, Jeroen Swinkels

*Corresponding author for this work

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

We study the moral hazard problem without the first-order approach or other common structure. We present sufficient conditions under which the shadow value of simultaneously tightening the minimum payment and individual rationality constraints has a simple and intuitive expression. We then show how this expression can be used to perform comparative statics exercises in which we study (i) the effect of a change in the agent's wealth on the well-being of the principal; and (ii) the effects of the outside option and minimum payment on the effort level optimally implemented.

Original languageEnglish (US)
Pages (from-to)2313-2343
Number of pages31
JournalJournal of Economic Theory
Volume148
Issue number6
DOIs
StatePublished - Nov 1 2013

Keywords

  • First-order approach
  • Moral hazard
  • Principal-agent

ASJC Scopus subject areas

  • Economics and Econometrics

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