Deterministic versus Stochastic Mechanisms in Principal–Agent Models

Strausz, Roland (September 2004): Deterministic versus Stochastic Mechanisms in Principal–Agent Models. SFB/TR 15 Discussion Paper No. 26

Abstract

This paper shows that, contrary to what is generally believed, decreasing concavity of the agent’s utility function with respect to the screening variable is not sufficient to ensure that stochastic mechanisms are suboptimal. The paper demonstrates, however, that they are suboptimal whenever the optimal deterministic mechanism exhibits no bunching. This is the case for most applications of the theory and therefore validates the literature’s usual focus on deterministic mechanisms.

• Item Type: Paper
• Keywords: principal-agent theory, mechanism design, deterministic mechanisms, randomization, bunching.
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A1 - Allokationsmechanismen in Organisationen und Märkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D82
• Language: English