What Can We Learn From Simulating a Standard Agency Model?
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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|Date of creation:||01 Apr 2001|
|Publication status:||Forthcoming, Economics Letters, 73 (2), pp. 136-147, November 2001|
|Contact details of provider:|| Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html|
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- Haubrich, Joseph G, 1994.
"Risk Aversion, Performance Pay, and the Principal-Agent Problem,"
Journal of Political Economy,
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- Mirrlees, James A., 1996.
"Information and Incentives: The Economics of Carrots and Sticks,"
Nobel Prize in Economics documents
1996-1, Nobel Prize Committee.
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- Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
- 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.
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