Incentive Problems with Unidimensional Hidden Characteristics: A Uni…fied Approach

Abstract

The paper develops a technique for studying incentive problems with unidimensional hidden characteristics in a way that is independent of whether the type set is …nite, the type distribution has a continuous density, or the type distribution has both mass points and an atomless part. By this technique, the proposition that optimal incentive schemes induce no distortion "at the top" and downward distortions "below the top" is extended to arbitrary type distributions. However, mass points in the interior of the type set require pooling with adjacent higher types and, unless there are other complications, a discontinuous jump in the transition from adjacent lower types.

Keywords: Hidden Characteristics, Incentive Problems, Principal-Agent Models, General Type Distributions

JEL Classification: D82, D86, C61