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The first-order approach to moral hazard problems with hidden saving

Koehne, S.; (2009) The first-order approach to moral hazard problems with hidden saving. (CDSE Discussion Paper 72). Center for Doctoral Studies in Economics (CDSE), University of Mannheim: Mannheim, Germany. Green open access

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Abstract

This paper proposes a general method to validate the first-order approach for moral hazard problems with hidden saving. I show that strong convexity assumptions both on the agent’s marginal utility of consumption and the distribution function of output arise naturally in this context. The first-order approach is valid given nonincreasing absolute risk aversion (NIARA) utility and log-convex distribution functions (LCDF) with monotone likelihood ratios (MLR). In a second step, I relax the LCDF condition by restricting the class of preferences and by imposing more structure on optimal wage schemes.

Type: Working / discussion paper
Title: The first-order approach to moral hazard problems with hidden saving
Open access status: An open access version is available from UCL Discovery
Publisher version: http://cdse.uni-mannheim.de/dipa.php
Language: English
Keywords: Principal-agent problems, moral hazard, hidden savings, first-order approach, log-convexity
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/18797
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