Econometrica Vol. 83 No. 2 2015
A Polynomial Optimization Approach to Principal-Agent Problems
Abstract
This paper presents a new method for the analysis of moral hazard principal-agent problems. The new approach avoids the stringent assumptions on the dis-tribution of outcomes made by the classical first-order approach and instead only requires the agent’s expected utility to be a rational function of the action. This assumption allows for a reformulation of the agent’s utility maximization problem as an equivalent system of equations and inequalities. This reformulation in turn trans-forms the principal’s utility maximization problem into a nonlinear program. Under the additional assumptions that the principal’s expected utility is a polynomial and the agent’s expected utility is rational in the wage, the final nonlinear program can be solved to global optimality. The paper also shows that the polynomial optimiza-tion approach, unlike the classical approach, extends to principal-agent models with multi-dimensional action sets.
- DOI
- 10.3982/ecta11351
- Volume
- 83
- Issue
- 2
- Pages
- 729-769
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref