Center for Doctoral Studies in Economics (CDSE), University of Mannheim
Abstract
This paper proposes a general method to validate the first-order approach for moral hazard problems with hidden saving. I show that strong convexity assumptions both on
the agent’s marginal utility of consumption and the distribution function of output arise naturally in this context. The first-order approach is valid given nonincreasing absolute risk aversion (NIARA) utility and log-convex distribution functions (LCDF) with monotone
likelihood ratios (MLR). In a second step, I relax the LCDF condition by restricting the class of preferences and by imposing more structure on optimal wage schemes