Stochastic mechanisms in settings without monetary transfers: The regular case

We analyze relative performance of stochastic and deterministic mechanisms in an environment that has been extensively studied in the literature on communication (e.g., Crawford and Sobel, 1982) and optimal delegation (e.g., Holmström, 1984): a principal-agent model with hidden information, no monetary transfers, and single-peaked preferences. We demonstrate that under the common assumption of quadratic payoffs and a certain regularity condition on the distribution of private information and the agent’s bias, the optimal mechanism is deterministic. We also provide an explicit characterization of this mechanism. JEL codes: D78, D82, L22, M54.