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Principal-Agent Problems with Exit Options

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Author Info

  • Jaksa Cvitanic

    (Caltech)

  • Xuhu Wan

    (Hong Kong University of Science and Technology)

  • Jianfeng Zhang

    (University of Southern California)

Abstract

We consider the problem of when to deliver the contract payoff, in a continuous-time principal-agent setting, in which the agent's effort is unobservable. The principal can design contracts of a simple form that induce the agent to ask for the payoff at the time of the principal's choosing. The optimal time of payment depends on the agent's and the principal's outside options. We develop a theory for general utility functions, while with CARA utilities we are able to specify conditions under which the optimal payment time is not random. However, in general, the optimal payment time is typically random. One illustrative application is the case when the agent can be fired, after having been paid a severance payment, and then replaced by another agent. The methodology we use is the stochastic maximum principle and its link to Forward-Backward Stochastic Differential Equations.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 8 (2008)
Issue (Month): 1 ()
Pages: 23

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Handle: RePEc:bpj:bejtec:v:8:y:2008:i:1:n:23

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Web page: http://www.degruyter.com

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Related research

Keywords: principal-agent problems; real options; exit decisions; forward backward stochastic differential equations;

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Cited by:
  1. Peter M. DeMarzo & Yuliy Sannikov, 2004. "A Continuous-Time Agency Model of Optimal Contracting and Capital Structure," NBER Working Papers 10615, National Bureau of Economic Research, Inc.
  2. Zhang, Yuzhe, 2009. "Dynamic contracting with persistent shocks," Journal of Economic Theory, Elsevier, vol. 144(2), pages 635-675, March.
  3. Hisashi Nakamura, 2007. "Strategic Default Jump as Impulse Control in Continuous Time ( Revised in February 2008 )," CARF F-Series CARF-F-115, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  4. Barlo, Mehmet & Ozdogan, Ayca, 2011. "Optimality of linearity with collusion and renegotiation," MPRA Paper 35548, University Library of Munich, Germany.
  5. Patrick Bolton & Christopher Harris, 2010. "The Dynamics of Optimal Risk Sharing," NBER Working Papers 16094, National Bureau of Economic Research, Inc.
  6. Cvitanic, Jaksa & Radas, Sonja & Sikic, Hrvoje, 2011. "Co-development ventures: Optimal time of entry and profit-sharing," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1710-1730, October.
  7. Cuoco, Domenico & Kaniel, Ron, 2009. "Equilibrium Prices in the Presence of Delegated Portfolio Management," CEPR Discussion Papers 7453, C.E.P.R. Discussion Papers.

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