Asymptotic Efficiency in Dynamic Principal-Agent Problems

Asymptotic Efficiency in Dynamic Principal-Agent Problems

In a seminal paper, B. R. Holmstro m and P. R. Milgrom (1987, Econometrica 55, 303 328) examine a principal-agent model in which the agent continuously controls the drift rate of a Brownian motion. Given a stationary environment, they show that the optimal sharing rule is a linear function of aggregated output. This paper considers a variant of the Brownian model in which control revisions take...

Dynamic Principal-Agent Problems

We consider a continuous-time setting, in which the agent can control both the drift and the volatility of the underlying process. The principal can observe the agent’s action and can offer payment at a continuous rate, as well as a bulk payment at the end of the fixed time horizon. In examples, we show that if the principal and the agent have the same CRRA utility, or they both have (possibly ...

Dynamic programming approach to principal-agent problems

We consider a general formulation of the Principal-Agent problem with a lump-sum payment on a finite horizon. Our approach is the following: we first find the contract that is optimal among those for which the agent’s value process allows a dynamic programming representation and for which the agent’s optimal effort is straightforward to find. We then show that, under technical conditions, the o...

Mind the Gap - Quantifying Principal-Agent Problems in Energy Efficiency

On Dynamic Principal-Agent Problems in Continuous Time

I study the provision of incentives in dynamic moral hazard models with hidden actions and possibly hidden states. I characterize implementable contracts by establishing the applicability of the first-order approach to contracting. Implementable contracts are history dependent, but can be written recursively with a small number of state variables. When the agent’s actions are hidden, but all st...