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What Can We Learn From Simulating a Standard Agency Model?

  • Michel Robe

    ()

    (American University)

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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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 98.

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Date of creation: 01 Apr 2001
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Publication status: Forthcoming, Economics Letters, 73 (2), pp. 136-147, November 2001
Handle: RePEc:sce:scecf1:98
Contact details of provider: Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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  1. Robe, Michel A., 1999. "Optimal vs. Traditional Securities under Moral Hazard," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 161-189, June.
  2. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  3. Joseph G. Haubrich, 1991. "Risk aversion, performance pay, and the principal-agent problem," Working Paper 9118, Federal Reserve Bank of Cleveland.
  4. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  5. Faynzilberg, Peter S. & Kumar, Praveen, 1997. "Optimal Contracting of Separable Production Technologies," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 15-39, October.
  6. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  7. Mirrlees, James A, 1997. "Information and Incentives: The Economics of Carrots and Sticks," Economic Journal, Royal Economic Society, vol. 107(444), pages 1311-29, September.
  8. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
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