Principal-agent problems with adverse selection: A stochastic target problem formulation
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arXiv
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| Hauptverfasser: | , , |
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| Format: | Preprint |
| Veröffentlicht: |
2026
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| _version_ | 1866910224373252096 |
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| author | Alvarez, Guillermo Alonso Ekren, Ibrahim Huang, Liwei |
| author_facet | Alvarez, Guillermo Alonso Ekren, Ibrahim Huang, Liwei |
| contents | We study a principal-agent problem with adverse selection, where the principal does not know the agent's true cost but must design a contract to optimize a specific criterion. Unlike standard screening frameworks that allow for self-selection, we assume the principal can only offer a unique contract. We show that the agent's optimization problem can be reformulated as a stochastic target problem. After characterizing the credible domain of this target problem, we show that the principal's objective can be solved as a stochastic optimal control problem with partial information and state constraints. The description of the credible domain also allows us to obtain the value of screening contracts. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2605_01080 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Principal-agent problems with adverse selection: A stochastic target problem formulation Alvarez, Guillermo Alonso Ekren, Ibrahim Huang, Liwei Theoretical Economics Optimization and Control We study a principal-agent problem with adverse selection, where the principal does not know the agent's true cost but must design a contract to optimize a specific criterion. Unlike standard screening frameworks that allow for self-selection, we assume the principal can only offer a unique contract. We show that the agent's optimization problem can be reformulated as a stochastic target problem. After characterizing the credible domain of this target problem, we show that the principal's objective can be solved as a stochastic optimal control problem with partial information and state constraints. The description of the credible domain also allows us to obtain the value of screening contracts. |
| title | Principal-agent problems with adverse selection: A stochastic target problem formulation |
| topic | Theoretical Economics Optimization and Control |
| url | https://arxiv.org/abs/2605.01080 |