Discrete-Time Approximations of the Holmstrom-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision
This paper studies the relation between discrete-time and continuous-time principal-agent models. We derive the continuous-time model as a limit of discrete-time models with ever shorter periods and show that optimal incentive schemes in the discrete-time models approximate the optimal incentive scheme in the continuous model, which is "linear in accounts". Under the additional assumption that the principal observes only cumulative total profits at the end and the agent can destroy profits unnoticed, an incentive scheme that is "linear in total profits" is shown to be approximately optimal in the discrete-time model when the length of the period is small. Copyright The Econometric Society 2002.
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Volume (Year): 70 (2002)
Issue (Month): 6 (November)
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- Mirrlees, J A, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 3-21, January.
- Hellwig, Martin F. & Schmidt, Klaus M., 2001.
"Discrete-Time Approximations of the HolmstrÃ¶m-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision,"
Discussion Papers in Economics
22, University of Munich, Department of Economics.
- Martin F. Hellwig & Klaus M. Schmidt, 2002. "Discrete-Time Approximations of the Holmstrom-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision," Econometrica, Econometric Society, vol. 70(6), pages 2225-2264, November.
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- Hellwig, Martin & Schmidt, Klaus M., 2001. "Discrete-Time Approximations of the Holmström-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision," Sonderforschungsbereich 504 Publications 01-52, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Hellwig, Martin F. & Schmidt, Klaus M., 2002. "Discrete-time approximations of the Holmström-Milgrom brownian-motion model of intertemporal incentive provision," Munich Reprints in Economics 19425, University of Munich, Department of Economics.
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