Existence of Optimal Mechanisms in Principal-Agent Problems

Posted: 29 Jan 2011 Last revised: 10 Jul 2012

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Philip Reny

University of Chicago - Department of Economics

Jeroen Swinkels

Northwestern University

Date Written: January 1, 2011

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.

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: https://ssrn.com/abstract=1749616 or http://dx.doi.org/10.2139/ssrn.1749616

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( 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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