Econometrica: May 2017, Volume 85, Issue 3

Existence of Optimal Mechanisms in Principal-Agent Problems

https://doi.org/10.3982/ECTA12340
p. 769-823

Ohad Kadan, Philip J. Reny, Jeroen M. Swinkels

We provide general conditions under which principal‐agent problems with either one or multiple agents admit mechanisms that are optimal for the principal. Our results cover as special cases pure moral hazard and pure adverse selection. We allow multidimensional types, actions, and signals, as well as both financial and non‐financial rewards. Our results extend to situations in which there are ex ante or interim restrictions on the mechanism, and allow the principal to have decisions in addition to choosing the agent's contract. Beyond measurability, we require no a priori restrictions on the space of mechanisms. It is not unusual for randomization to be necessary for optimality and so it (should be and) is permitted. Randomization also plays an essential role in our proof. We also provide conditions under which some forms of randomization are unnecessary.

Log In To View Full Content

Back