8

The term principal-agent problem is due to Ross (1973) (per Stiglitz, 1989). Other early contributions to this literature include Mirrlees (1974, 1976) and Stiglitz 1974, 1975).


5

I found "Contract Theory" by Patrick Bolton and Mathias Dewatripont to be a very nice and thorough book. It, however, might be too advanced, although you can skip the formalism and just read the intuitions provided. Let me quote how the book is advertised: The book emphasizes applications rather than general theorems while providing self-contained, ...


5

In my PhD program everyone was using The Theory of Incentives: The Principal-Agent Model by Jean-Jacques Laffont and David Martimort. It offers a formal and relatively complete treatment without being too technical. I haven't read any other book on the topic, so unfortunately I cannot compare. If you want to avoid any mathematical formalism, a good ...


5

Just a model that can be used to state how (in)complete a particular contract is, whatever the reason. I remember a debate at the end of the 90's on Incomplete Contracts: Where do We Stand? by Jean Tirole and Foundations of Incomplete Contracts by Hart and Moore, where they develop a model that provides a rigorous foundation for the idea that contracts are ...


5

I'm not sure what exactly you're looking for, but here are some wild guesses: Bolton and Dewatripont (2005) Contract Theory, MIT Press. [Probably Chapters 5 and 6] Maskin and Tirole (1990) "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values", Econometrica 58: 379-409. Maskin and Tirole (1992) "The ...


4

Contracting with an informed principal is not so easy because the agent can learn about the principal's type from the kind of contract offered. This introduces signaling, which can quickly get messy. The other answer already mentioned the three seminal papers in that literature. I think Myerson's paper fits best for your goal to understand moral hazard with ...


4

A thing that bothers me here is the following: the Incentive Compatibility constraint is $$IC: w'p(a') + w(1-p(a')) - 1 \geq w'p(a) + w(1-p(a))$$ $$\implies w'-w \geq \frac {1}{p(a')-p(a)} \tag{1}$$ ...since by assumption $p(a')-p(a) >0$. We are told that we should find that at the optimum, $$x'-w' = x-w \implies x'-x = w'-w \tag{2}$$ Combining $(1)...


3

Notice that MWG choose a wage function $w(\pi)$ to maximize profit, not a wage level $w$. As footnote 6 on p.481 of MWG says: The first-order condition for $w(\pi)$ is derived by taking the derivative with respect to the manager's wage at each level of $\pi$ separately. In other words, you'd treat the wage function as a variable, e.g. $w(\pi)=z$, and ...


3

This answer shows three things: We do not need the Lagrangian approach to solve your maximization problem. We do not need the assumption that $x'-x=\frac{1}{p(a')-p(a)}$ either. The condition $x'-w'=x-w$ is not necessarily satisfied for the optimal contract. Fix indeed the payment $w$. The problem can be written \begin{equation*} \max_{w'}{u(x'-w')p(a')} \...


3

It is true that when both principal and agent are risk neutral, the first best can be obtained despite asymmetric information. You should refer to a textbook, such as MWG (ch.14), for the technical details of such models. I'll give an intuitive explanation here. The intuition of the result lies in optimal risk sharing between the principal and the agent. ...


3

We are given that $u$ is increasing and concave, and $u(0) = 0$. This implies that $\dfrac{u(t)}{t}$ is decreasing in $t$, and also, $\dfrac{u(t)}{t} > u'(t)$ for all $t$. Nicole's maximization problem : \begin{eqnarray*} \max_{x} \ q(x)(w-t(x))\end{eqnarray*} FOC : $q'(x)(w-t(x)) = q(x)t'(x)$ Suppose $x_N$ solves Nicole's problem. Therefore, it ...


3

This looks like a contest. There is a large economic literature on contests. Have a look at this survey by Corchón and Serena. Often these papers use a Tullock contest success function or model the contest as an all-pay auction, see, e.g., papers by Ron Siegel. There are papers that analyze given contests (research contests, lobbying, etc) and papers that ...


2

While it's not explicitly mentioned in the question, it seems safe to assume that the manager gets to observe separately the outcome of each worker, i.e. the value of $v_i$ for $i=1,2$. If this is the case, the IR and IC conditions depend on the exact terms of the contract. For example, suppose the manager conditions each worker $i$'s wage on both $v_i$ and $...


2

In direct mechanism agents directly report their preferences (preferences are observable). In indirect mechanism agents don’t report their preferences directly. Preferences can be observed only indirectly through signals or behavior. By Revelation Principle if some outcomes can be implemented in indirect mechanism they must be also implementable in the ...


2

Not all principal-agent problems are the result of incomplete contracts, no. In fact, in most principal-agent problems, complete contracts are assumed. An incomplete contract is one that cannot be contingent on every possible outcome that could occur after the contract is signed. You can't write a contract that gives out a different payment to each party ...


2

"The Economics of Contracts" by Bernard Salanié is nice and concise. Like the Bolton and Dewatripont book suggested by Bayesian (and most other books on this topic) it is pitched at a graduate level and certainly does not fall into the "popular science" category. The theory of contracts grew out of the failure of the general equilibrium model to account ...


2

I think its not a complex issue: a) You need to keep the high type agent from pretending to be the ow type agent, so you give him an extra compensation from showing his high type. But this nice deal pays him more than necessary to keep him in the game so his IR is more than satisfied, i.e. not binding. b) Similarly, you will make it painful to show that ...


2

If we try to directly optimize with respect to $t$, given this system (two unknwowns, one equation), we get a nonsensical result. $$\frac{\partial P}{\partial t}: -s = 0$$ Which may not be true, and I'm assuming you are taking $s$ as given, not something to choose. You can only optimize with respect to $x$. $$\frac{\partial P}{\partial x} = 1 - sx = 0 \...


1

From Bolton and Dewatripont Contract Theory (2005, p.135): "In the absence of risk aversion on the part of the agent and no wealth constraints, the first best can be achieved by letting the agent "buy" the output from the principal." This quote is in the context of a simple two outcome model.


1

"Steep incentives schemes" are synonymous with "high-powered incentives". A steep incentive scheme is thus one in which there is a large or high-powered performance incentive. This can take either the form of a small fixed payment and a (potentially) large bonus, or it can be a large fixed payment and a (potentially) large penalty for deviation. Normally we ...


1

Think about an auction, where the designer is selling good and trying to sell it to the person that values it the most while collecting as much revenue as possible. A direct mechanism means that the seller asks buyers for how much they value the good and based on that decides who gets the good and how much they pay. Suppose that the designer uses a second-...


1

Commitment here is with respect to the direct mechanism that implements the indirect mechanism. Let $M = \{S,(q,t)\}$ be an indirect mechanism. By the revelation principal, there exists a direct mechanism $M' = \{\Theta,(q',t')\}$ that can implement the same outcome as the indirect mechanism. For $M'$ to implement the same outcome, when the designer tells ...


1

Moral hazard models feature agents' hidden actions (or these actions are not contractible). For example, a manager's contract cannot determine a wage contingent on the manager's effort, only contingent on other observable outcomes such as "success" / "no success" of a project. The next two classes of models assume that actions are observable/contractible, ...


1

I believe this is the basic case discussed in the Laffont-Martimort textbook "The Theory of Incentives". The choice of the agent is either 0 or 1. You can find a complete description in "The Moral Hazard" chapter, section 4.2. The results are listed later, and while I am not sure, I do not think there should be qualitative differences.


Only top voted, non community-wiki answers of a minimum length are eligible