A Continuous-Time Version of the Principal-Agent
AbstractThis paper describes a new continuous-time principal-agent model, in which the output is a diffusion process with drift determined by the agentâ€™s unobserved effort. The risk-averse agent receives consumption continuously. An optimal contract, based on the agentâ€™s continuation value as a state variable, is computed by a new method using a differential equation. During employment the output path stochastically drives the agentâ€™s continuation value until it hits a low retirement point or a high retirement point. Unlike in related discrete-time models, one can use calculus to derive comparative statics and evaluate inefficiency
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 188.
Date of creation: 11 Nov 2005
Date of revision:
Principal-agent model; hidden action; optimal contract; Brownian motion;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
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