2. Ross, Stephen A. 1973. “The Economic Theory of Agency: The Principal’s Problem.” American Economic Review, 63(2): 134–39.
This paper was the first to describe and analyze the canonical principal-agent problem with moral hazard, which has since become a cornerstone of microeconomic theory. It solved for the optimal compensation scheme using the first-order approach, and compared the solution to the first-best arrangement, noting that the two generally diverge due to the principal’s need to motivate the agent. It characterized the class of utility functions for which the principal’s solution is first-best optimal regardless of the payoff structure, as well as the class of payoff structures for which the solution is first-best optimal regardless of the utility functions. In only a handful of terse pages, it anticipated many of the central issues with which the subsequent literature was concerned.
These are our favorite most influential economics papers. However, according to RePec, here are the 10 most influential papers in economics (this list excludes econometrics paper as well as working papers):
2. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. “Law and Finance,” Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.