What Can We Learn From Simulating a Standard Agency Model?
AbstractFor 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 InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 98.
Date of creation: 01 Apr 2001
Date of revision:
Publication status: Forthcoming, Economics Letters, 73 (2), pp. 136-147, November 2001
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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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Moral Hazard; Numerical Analysis; Reduced-Form Equation; Limited Liability.;
Other versions of this item:
- Robe, Michel A., 2001. "What can we learn from simulating a standard agency model?," Economics Letters, Elsevier, vol. 73(2), pages 137-146, November.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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