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A Continuous-Time Version of the Principal-Agent

Author

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  • Yuliy Sannikov

    (Department of Economics University of California, Berkeley)

Abstract

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

Suggested Citation

  • Yuliy Sannikov, 2005. "A Continuous-Time Version of the Principal-Agent," Computing in Economics and Finance 2005 188, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:188
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    More about this item

    Keywords

    Principal-agent model; hidden action; optimal contract; Brownian motion;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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