On the first order approach for bilevel programming: moral hazard case

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  • 1. School of Economics, Research Center for China's Digital Economy, Zhejiang University, Hangzhou 310058, Zhejiang, China;
    2. Department of Mathematics, Southern University of Science and Technology, National Center for Applied Mathematics Shenzhen, Shenzhen 518055, Guangdong, China

Received date: 2021-03-19

  Online published: 2021-09-26

Abstract

We revisit the first-order approach (FOA) in a classical setting of moral hazard model with multi-dimensional signal. After providing formal justification of Lagrangian duality, we reformulate the issue of validiting the FOA as an issue of the existence of a fixed point of the agent's best reaction to the principal's targeted effort level. Therefore, it is unnecessary to show the validity based on the global concavity of the agent's expected under a subclass of monotone contract. The new method allows the relaxation of several requirements of previous approaches. We generalize some results of Sinclair-Desgagne (1994) and Conlon (2009a) to validate the FOA for either the mixture probability model without the likelihood ratio order, or certain exponential family distributions with a bounded likelihood ratio.

Cite this article

KE Rongzhu, ZHANG Jin . On the first order approach for bilevel programming: moral hazard case[J]. Operations Research Transactions, 2021 , 25(3) : 87 -104 . DOI: 10.15960/j.cnki.issn.1007-6093.2021.03.005

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