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A Continuous-Time Version of the Principal-Agent

  • Yuliy Sannikov


    (Department of Economics University of California, Berkeley)

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    This paper describes a new continuous-time principal-agent model, in which the output is a diffusion process with drift determined by the agent’s unobserved effort. The risk-averse agent receives consumption continuously. An optimal contract, based on the agent’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 agent’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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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 188.

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    Date of creation: 11 Nov 2005
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    Handle: RePEc:sce:scecf5:188
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