What is the term for the contract that maximizes the principal's payoff subject to the constraint that the principal lacks the agent's private information?
A)First best
B)Second best
C)Third best
D)Pareto optimum

Question

Quizplus · Accepted Answer

The term for the contract that maximizes the principal's payoff subject to the constraint that the principal lacks the agent's private information is known as the second best contract. The first best contract assumes that the principal has complete information about the agent's actions, while the second best contract takes into account the information asymmetry between the principal and the agent. The third best contract refers to a situation where the principal has incomplete information but is not constrained by any incentive compatibility or participation constraints. Pareto optimum refers to a situation where it is not possible to make one party better off without making another party worse off.

What Is the Term for the Contract That Maximizes the Principal's