Existence of Optimal Mechanisms in Principal-Agent Problems
Washington University in Saint Louis - John M. Olin Business School
University of Chicago - Department of Economics
January 1, 2011
MFI Working Paper No. 2011-002
Becker Friedman Institute for Research in Economics Working Paper No. 2011-002
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.
Date posted: January 29, 2011 ; Last revised: July 10, 2012