Abstract

http://ssrn.com/abstract=1749616
 


 



Existence of Optimal Mechanisms in Principal-Agent Problems


Ohad Kadan


Olin Business School, Washington University in St. Louis

Philip Reny


University of Chicago - Department of Economics

Jeroen Swinkels


Northwestern University

January 1, 2011

MFI Working Paper No. 2011-002
Becker Friedman Institute for Research in Economics Working Paper No. 2011-002

Abstract:     
We provide general conditions under which principal-agent problems admit mechanisms that are optimal for the principal. Our result covers as special cases those in which the agent has no private information - i.e., pure moral hazard - as well as those in which the agent's only action is a participation decision - i.e., pure adverse selection. We allow multi-dimensional actions and signals, as well as both financial and non-financial rewards. Beyond measurability, we require no a priori restrictions on the space of mechanisms. Consequently, our optimal mechanisms are optimal among all measurable mechanisms. A key to obtaining our result is to permit randomized mechanisms. We also provide conditions under which randomization is unnecessary.

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Date posted: January 29, 2011 ; Last revised: July 10, 2012

Suggested Citation

Kadan, Ohad and Reny, Philip and Swinkels, Jeroen, Existence of Optimal Mechanisms in Principal-Agent Problems (January 1, 2011). MFI Working Paper No. 2011-002; Becker Friedman Institute for Research in Economics Working Paper No. 2011-002. Available at SSRN: http://ssrn.com/abstract=1749616 or http://dx.doi.org/10.2139/ssrn.1749616

Contact Information

Ohad Kadan
Olin Business School, Washington University in St. Louis ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Philip Reny (Contact Author)
University of Chicago - Department of Economics ( email )
1126 East 59th Street
Chicago, IL 60637
United States
773-702-8192 (Phone)
773-702-7587 (Fax)
Jeroen Swinkels
Northwestern University ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
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