A Continuous-Time Version of the Principal-Agent
This 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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