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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. ...


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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 ...


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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.


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"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 ...


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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-...


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