Distributions for the first-order approach to principal-agent problems

LiCalzi, Marco; Spaeter, Sandrine

doi:10.1007/s00199-001-0250-y

Cited by 44 publications

(28 citation statements)

References 10 publications

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“…In particular, Jewitt (1988) observes that few distributions satisfy both the MLRP and CDFC conditions. One distribution was provided by Rogerson (1985) (attributed to Steve Matthews) and later two classes of di¤erentiable examples were provided by Licalzi and Spaeter (2003).…”

Section: Proposition 3: (I) Mlrp Implies That the Critical Ratio ( ; mentioning

confidence: 99%

The form of incentive contracts: agency with moral hazard, risk neutrality, and limited liability

Poblete

Spulber²

2012

The RAND J of Economics

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The analysis obtains a complete characterization of the optimal agency contract with moral hazard, risk neutrality, and limited liability. We introduce a “critical ratio” that indicates the returns to providing the agent with incentives for effort in each random state. The form of the contract is debt (a capped bonus) when the critical ratio is increasing (decreasing) in the state. An increasing critical ratio in the state‐space setting corresponds to the hazard rate order for the reduced‐form distribution of output, which we term the “decreasing hazard rate in effort property” (DHREP). The critical ratio also yields insights into agency with adverse selection.

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Section: Proposition 3: (I) Mlrp Implies That the Critical Ratio ( ; mentioning

confidence: 99%

The form of incentive contracts: agency with moral hazard, risk neutrality, and limited liability

Poblete

Spulber²

2012

The RAND J of Economics

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“…To verify the consistency of Equation (26) with the first-order approach, we now consider an example of distribution that satisfies the two properties that are sufficient for the first-order condition to be valid when the conditional distribution of loss is a function of e: the convexity of the distribution function with respect to effort F ee > 0 and the monotone likelihood ratio property (MLRP) (Milgrom 1981;Rogerson 1985;LiCalzi and Spaeter 2013).…”

Section: Optimal Retention Ratementioning

confidence: 99%

“…This distribution was proposed by Rogerson (1985). For two other distributions with the MLRP, see LiCalzi and Spaeter (2013). First, we need to compute the MLRP to make sure that the optimality conditions are satisfactory.…”

Section: Appendix B Specific Distribution and Constant Risk Aversionmentioning

confidence: 99%

Optimal Form of Retention for Securitized Loans under Moral Hazard

Dionne

Malekan

2017

Risks

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Abstract:We address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement (tranching) procedure. We assume that the originator can affect the default probability and the conditional loss distribution. We show that the optimal form of retention must be proportional to the pool default loss even in the absence of systemic risk when the originator can affect the conditional loss given default rate, yet the current regulations propose a constant retention rate.

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“…He maintains the MLRC, but relaxes the CDFC by imposing other restrictions. 8 Later, LiCalzi and Spaeter (2003) show that some reasonable classes of distributions actually satisfy both the MLRC and the CDFC.…”

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confidence: 99%

Optimal Brokerage Commissions for Fair Insurance: A First Order Approach

Hau

2011

Geneva Risk Insur Rev

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This paper studies a principal-agent insurance brokerage problem with a riskaverse principal (an insured) and a risk-neutral agent (a broker). The concept of "mean-preserving, spread-reducing" (MPSR) effort is introduced to model the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may "concavify" the reward function to induce the risk-neutral agent to exert MPSR brokering effort. These conditions, together with an additional condition, guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the firstorder approach) is violated.

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Distributions for the first-order approach to principal-agent problems

Cited by 44 publications

References 10 publications

The form of incentive contracts: agency with moral hazard, risk neutrality, and limited liability

The form of incentive contracts: agency with moral hazard, risk neutrality, and limited liability

Optimal Form of Retention for Securitized Loans under Moral Hazard

Optimal Brokerage Commissions for Fair Insurance: A First Order Approach

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