On the first-order approach in principal agent models with hidden borrowing and lending
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
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.
Moral hazard, Hidden savings, First-order approach, Log-convexity
Economics and Business
IdentifiersURN: urn:nbn:se:su:diva-66575DOI: 10.1016/j.jet.2011.03.002ISI: 000293869700002OAI: oai:DiVA.org:su-66575DiVA: diva2:468628
authorCount :32011-12-212011-12-202011-12-21Bibliographically approved