(DP 1989-07) Principal and Agent in a Lexicographic Model

Abstract

This paper formulates the principal-agent problem in a lexicographic arbitration framework. Applying a previous result, the solution satisfies four conditions similar to those of Nash (1950) and is the only solution that does so. Less risk aversion in the sense of this paper implies a riskier choice, and there is a rationale for the agent's fee to be a linear function of the monetary outcome. JEL 026.