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T. Hemmer, O. Kim and R. Verrecchia, “Introducing Convexity into Optimal Compensation Contracts,” Journal of Accounting and Economics, Vol. 28, No. 3, 2000, pp. 307-327. doi:10.1016/S0165-4101(00)00008-2

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.