For helpful comments and suggestions, I thank Christoph Engel, Alia Gizatulina, Hendrik Hakenes, and Klaus Ritzberger, as well as a co-editor and three referees.
Incentive Problems With Unidimensional Hidden Characteristics: A Unified Approach
Version of Record online: 28 JUL 2010
© 2010 The Econometric Society
Volume 78, Issue 4, pages 1201–1237, July 2010
How to Cite
Hellwig, M. F. (2010), Incentive Problems With Unidimensional Hidden Characteristics: A Unified Approach. Econometrica, 78: 1201–1237. doi: 10.3982/ECTA7726
- Issue online: 28 JUL 2010
- Version of Record online: 28 JUL 2010
- Manuscript received February, 2008; final revision received April, 2010.
- Incentive problems;
- principal–agent models;
- hidden characteristics;
- general type distributions
This paper develops a technique for studying incentive problems with unidimensional hidden characteristics in a way that is independent of whether the type set is finite, the type distribution has a continuous density, or the type distribution has both mass points and an atomless part. By this technique, the proposition that optimal incentive schemes induce no distortion “at the top” and downward distortions “below the top” is extended to arbitrary type distributions. However, mass points in the interior of the type set require pooling with adjacent higher types and, unless there are other complications, a discontinuous jump in the transition from adjacent lower types.