Question

1. Characterize the first-best contract in the context of a monopoly principal offering it to
multiple agents.
a. What are the most important assumptions for your results?
b. Are these contracts able to achieve allocative efficiency? If yes, prove it.
c. Are participation constraints of the agent binding? Why?

Answer 1

Answer:

In contract theory

The first-best refers to the best you could do if you knew agents' preferences over labor an income (i.e., if you did not have to impose the incentive compatibility constraint), and the second-best is the best you can do if agents have to reveal their preferences themselves