D. Diamond and R. Verrecchia, “Optimal Managerial Contracts and Equilibrium Security Prices,” Journal of Finance, Vol. 37, No. 2, 1982, pp. 275-287. doi:10.2307/2327326
has been cited by the following article:
TITLE: On the Consistency of the First-Order-Approach to Principal-Agent Problems
AUTHORS: Óscar Gutiérrez
KEYWORDS: Moral Hazard; Principal-Agent Model; First-Order Approach; Likelihood Ratio; Option-Like Incentives.
JOURNAL NAME: Theoretical Economics Letters, Vol.2 No.2, May 23, 2012
ABSTRACT: This paper revisits the principal-agent model with moral hazard when its solution is obtained invoking the first-order-approach. We show that the solution can be economically inconsistent even when “sufficient conditions” ensuring its validity ([1,2]) hold. To be more precise, we provide examples where is impossible to find Lagrange multipliers validating the approach. The correct solution to the problem provides a rationale for option-like contracts and minimum payments.