The Mathematics of principal-agent problem with adverse selection
Date
2011-08-19
Authors
Shadnam, Mojdeh
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Abstract
This thesis studies existence and characterization of optimal solutions to the principal-agent problem with adverse selection for both discrete and continuous problems. The existence results are derived by the abstract concepts of differentiability and convexity.
Under the Spence Mirrlees condition, we show that the discrete problem reduces to a problem that always satisfies the linear independence constraint qualification, while the continuum of type problem becomes an optimal control problem. We then use the Ellipsoid algorithm to solve the problem in the discrete and convex case. For the problem without the Spence Mirrlees condition, we consider different classes of constraint qualifications. Then we introduce some easy-to-check conditions to verify these constraint qualifications. Finally we give economic interpretations for several numerical examples.
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Keywords
Principal-agent problem, Adverse selection