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A Graphical Approach to the Standard Principal-Agent Model

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  • Xianming Zhou

Abstract

An obstacle to the teaching of principal-agent theory is the technical complexity and intractability of the general model. Even in academic studies strong assumptions are often imposed so as to derive an analytical solution. The author describes a graphical approach to the standard principal-agent model. Characterizing equilibrium in the contract space defined by the incentive parameter and insurance component of pay under a linear contract, this approach provides a simple and intuitive method for analyzing the principal-agent problem, which can be easily understood by students of economics with basic knowledge of algebra and differentiation. The approach has shown to be convenient and rich for comparative statics analyses.

Suggested Citation

  • Xianming Zhou, 2002. "A Graphical Approach to the Standard Principal-Agent Model," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(3), pages 265-276, September.
    • Handle: RePEc:taf:jeduce:v:33:y:2002:i:3:p:265-276
    DOI: 10.1080/00220480209595191
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    References listed on IDEAS

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    1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
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    Cited by:

    1. Dal Forno, Arianna & Merlone, Ugo, 2010. "Incentives and individual motivation in supervised work groups," European Journal of Operational Research, Elsevier, vol. 207(2), pages 878-885, December.
    2. Miles B. Cahill & Alaina C. George, 2005. "Executive Compensation Incentives in a Volatile Market," The American Economist, Sage Publications, vol. 49(2), pages 33-43, October.
    3. Yih-Chearng Shiue & Ming-Chang Lee & Pei-Jian Lin & Yao-Wen Huang, 2015. "Investor and venture fund managers remuneration paid mechanism based on principle-agent model," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 5(9), pages 143-151, September.

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