Ross,StephenA. 1973. "The EconomicTheory of Agency:The Principal's
Problem." AmericanEconomicReview,63(2): 134-39.
This
paperwas thefirsttodescribeandanalyzethecanonicalprincipal-agent
problemwithmoralhazard,whichhas sincebecomea cornerstone ofmicroeconomictheory. Itsolvedfortheoptimalcompensationschemeusingthefirst-order
approach, andcomparedthesolutiontothefirst-best arrangement, notingthatthe
twogenerallydivergeduetotheprincipal'sneedtomotivate theagent.Itcharacterizedtheclassofutilityfunctions forwhichtheprincipal'ssolutionis first-best
optimalregardless ofthepayoffstructure, as wellas theclassofpayoffstructures
forwhichthesolutionisfirst-best optimal regardless oftheutilityfunctions. Inonly
a handful ofterse
pages,itanticipatedmanyofthecentralissueswithwhichthe
subsequent literature wasconcerned.