A COMPLETE SOLUTION TO A CLASS OF PRINCIPAL-AGENT PROBLEMS WITH AN APPLICATION TO THE CONTROL OF A SELF-MANAGED FIRM

A COMPLETE SOLUTION TO A CLASS OF PRINCIPAL-AGENT PROBLEMS WITH AN APPLICATION TO THE CONTROL OF A SELF-MANAGED FIRM

Introduction

This paper considers a class of principal-agent problems which have the following features. (1) There is adverse selection because the principal ignores the value of one parameter of the agent’s true characteristics. (2) Leaving aside the information parameter, the principal’s welfare as well as the agent’s welfare depend on two types of variables, observable to both of them. The first ones, possibly multidimensional, are called action variable(s), and the second one, which is one-dimensional, has in general the meaning of a money transfer. (3) The principal is a Stackelberg leader of the two-person game. He can commit himself to decision rules which are admissible on informational grounds. He optimizes within the adequate class, taking into account, besides the agent’s reaction, one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint. The optimization is limited to the class of non-stochastic mechanisms. (4) The problem can also receive an alternative interpretation: the principal faces a continuum of agents of unknown characteristics (the distribution being known, however). Stylized principal agent problems of this type have often been considered in the economic literature.

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A COMPLETE SOLUTION TO A CLASS OF PRINCIPAL-AGENT PROBLEMS WITH AN APPLICATION TO THE CONTROL OF A SELF-MANAGED FIRM

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