On the Moral Hazard Problem without the First-Order Approach, Journal of Economic Theory
We study the moral hazard problem without the first-order approach or other common structure. We present sufficient conditions under which the shadow value of simultaneously tightening the minimum payment and individual rationality constraints has a simple and intuitive expression. We then show how this expression can be used to perform comparative statics exercises in which we study (i) the effect of a change in the agent’s wealth on the well-being of the principal; and (ii) the effects of the outside option and minimum payment on the effort level optimally implemented.
Jeroen Swinkels, Ohad Kadan
Swinkels, Jeroen, and Ohad Kadan. 2013. On the Moral Hazard Problem without the First-Order Approach. Journal of Economic Theory. 148: 2313-2343.READ