An Analysis of the Principal-Agent Problem

Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent's utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative...

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Bibliographic Details
Published inEconometrica Vol. 51; no. 1; pp. 7 - 45
Main Authors Grossman, Sanford J., Hart, Oliver D.
Format Journal Article
LanguageEnglish
Published Menasha, Wis The Econometric Society 01.01.1983
George Banta Pub. Co. for the Econometric Society
Blackwell Publishing Ltd
Subjects
Costs
Economic theory
Expected utility
Incentive compatibility problem
Lotteries
Minimization of cost
Principal agent problem
Risk aversion
Risk sharing
Spreading risk
Sufficient conditions
Utility functions
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Summary:Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent's utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative procedure. If the agent's preferences over income lotteries are independent of action, we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem. We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
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ISSN:0012-9682
1468-0262
DOI:10.2307/1912246