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What Can We Learn From Simulating a Standard Agency Model?

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  • Michel Robe

    ()
    (American University)

Abstract

For typical parametrizations of the standard Holmstrom (1979) agency model, this paper demonstrates that the set of first-order conditions characterizing the optimal contract can be reduced to a single equation. A problem of investment financing under moral hazard is used to illustrate the reduced-form equation's usefulness in quantitative applications. When the agent has CARA preferences over consumption, it is shown that any exogenous limit on the penalties for low output is always binding.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 98.

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Date of creation: 01 Apr 2001
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Publication status: Forthcoming, Economics Letters, 73 (2), pp. 136-147, November 2001
Handle: RePEc:sce:scecf1:98

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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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Related research

Keywords: Moral Hazard; Numerical Analysis; Reduced-Form Equation; Limited Liability.;

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References

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  1. Robe, Michel A., 1999. "Optimal vs. Traditional Securities under Moral Hazard," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 161-189, June.
  2. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  3. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  4. Faynzilberg, Peter S. & Kumar, Praveen, 1997. "Optimal Contracting of Separable Production Technologies," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 15-39, October.
  5. Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 258-76, April.
  6. Mirrlees, James A., 1996. "Information and Incentives: The Economics of Carrots and Sticks," Nobel Prize in Economics documents 1996-1, Nobel Prize Committee.
  7. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  8. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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Cited by:
  1. Zsuzsanna Fluck & Kedran Garrison & Stewart C. Myers, 2005. "Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance," NBER Working Papers 11624, National Bureau of Economic Research, Inc.
  2. Calcagno, R. & Renneboog, L.D.R., 2004. "Capital Structure and Managerial Compensation: The Effects of Remuneration Seniority," Discussion Paper 2004-015, Tilburg University, Tilburg Law and Economic Center.
  3. Olmos, Marta Fernandez & Rosell-Martinez, Jorge & Espitia-Escuer, Manuel Antonio, 2008. "The yield/quality trade-off and contractual choice," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6065, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Olmos, Marta Fernandez & Martinez, Jorge Rosell, 2010. "The Quality-Quantity Trade-off in the Principal-Agent Framework," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 11(1), January.

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