A general Lagrangian approach for non-concave moral hazard problems
Humberto Moreira | Araujo, Aloisio
Moral hazard; Lagrangian; first order approach.
We establish Lagrangian for the moral hazard problem which generalizes the well know first order approach (FOA). It requires that besides the multiplier of the first order condition, there exist multipliers for the second order condition and for the binding actions of the incentive compatibility constraint. Some examples show that our approach can be useful to treat the finite and infinite state space cases. One of the examples is solved by the second order approach. We also compare our Lagrangian with Mirrlees'.