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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Length: Date of creation: 01 Apr 2001 Date of revision: Publication status: Forthcoming, Economics Letters, 73 (2), pp. 136-147, November 2001 Handle: RePEc:sce:scecf1:98
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
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