Mar 21, 2012 Report No：11-27
A Numerical Approach to the Contract Theory: the Case of Adverse Selection
By building and solving numerical models of the parts supply problems (an example of the adverse selection problems), and analyzing various issues of the contract theory, we demonstrate the benefits of the numerical approach. First, this approach facilitates the understanding of the contract theory by beginners, who find it difficult to comprehend the theoretical and general models. Second, this approach could extend the analysis areas beyond those of the theoretical models, which are limited by the simplifying assumptions imposed in order to make their analysis possible. The expansion of the number of the supplier types is one example.
|Keywords||Numerical approach; principal-agent problem; adverse selection; numerical and computational model; Spence-Mirrlees single crossing property; monotonicity|