An Analysis of the Principal-Agent Problem

Part of the Huebner International Series on Risk, Insurance and Economic Security book series (HSRI, volume 14)


Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent’s utility being at a stationary point. An important paper of Mirrlees has shown that this approach is generally invalid. We present an alternative procedure. If the agent’s preferences over income lotteries are independent of action, we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem. We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.


Incentive Scheme Risk Averse Incentive Problem Optimal Incentive Scheme High Return State 
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Copyright information

© Springer Science+Business Media New York 1992

Authors and Affiliations

  1. 1.University of ChicagoUSA
  2. 2.London School of EconomicsUSA

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