The Theory of Moral Hazard and Unobservable Behaviour: Part I

The Theory of Moral Hazard and Unobservable Behaviour: Part I. Mirrlees, J. A. Review of Economic Studies, 66(1):3-21, 01/1999, 1999.

Paper abstract bibtex

This article presents information on principal-agent models in which outcomes conditional on the agent\textquoterights action are uncertain, and the agent\textquoterights behavior therefore unobservable. For a model with bounded agent\textquoterights utility, conditions are given under which the first-best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes. For general models, it is shown that the solution may not always be obtained by using the agent\textquoterights first-order conditions as constraint. General conditions of Lagrangean type are given for problems in which contracts are finite-dimensional.

@article {RePEc:bla:restud:v:66:y:1999:i:1:p:3-21,
	title = {The Theory of Moral Hazard and Unobservable Behaviour: Part I},
	journal = {Review of Economic Studies},
	volume = {66},
	number = {1},
	year = {1999},
	month = {01/1999},
	pages = {3-21},
	abstract = {This article presents information on principal-agent models in which outcomes conditional on the agent{\textquoteright}s action are uncertain, and the agent{\textquoteright}s behavior therefore unobservable. For a model with bounded agent{\textquoteright}s utility, conditions are given under which the first-best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes. For general models, it is shown that the solution may not always be obtained by using the agent{\textquoteright}s first-order conditions as constraint. General conditions of Lagrangean type are given for problems in which contracts are finite-dimensional.},
	keywords = {contracts, Lagrangean conditions, unobservability},
	url = {http://econpapers.repec.org/RePEc:bla:restud:v:66:y:1999:i:1:p:3-21},
	author = {Mirrlees, James A.}
}

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