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On the first-order approach in principal agent models with hidden borrowing and lending
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2011 (English)In: Journal of Economic Theory, ISSN 0022-0531, E-ISSN 1095-7235, Vol. 146, no 4, 1331-1361 p.Article in journal (Refereed) Published
Abstract [en]

We provide sufficient conditions for the validity of the first-order approach for two-period dynamic moral hazard problems where the agent can save and borrow secretly. The first-order approach is valid if the following conditions hold: (i) the agent has non-increasing absolute risk aversion utility (NIARA), (ii) the output technology has monotone likelihood ratios (MLR), and (iii) the distribution function of output is log-convex in effort (LCDF). Moreover, under these three conditions, the optimal contract is monotone in output. We also investigate a few possibilities of relaxing these requirements.

Place, publisher, year, edition, pages
2011. Vol. 146, no 4, 1331-1361 p.
Keyword [en]
Moral hazard, Hidden savings, First-order approach, Log-convexity
National Category
Economics and Business
URN: urn:nbn:se:su:diva-66575DOI: 10.1016/j.jet.2011.03.002ISI: 000293869700002OAI: diva2:468628
authorCount :3Available from: 2011-12-21 Created: 2011-12-20 Last updated: 2011-12-21Bibliographically approved

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Koehne, Sebastian
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