Numerical Analysis of a Dynamic Model of Agency
27 Pages Posted: 6 Oct 2009
Date Written: July 2005
Abstract
This paper considers an infinite-horizon principal-agent model with moral hazard. Following the insights of Grossman and Hart (1983) and the methodology of recursive contracts we are able to establish properties of the optimal dynamic contract analytically. We solve the contracting problem numerically, simulate the long-run distributions of discounted utility (the state variable) for different initial conditions, and calculate the moments of the policy functions. This allows us to further our understanding of the trade-offs between current and deferred compensation in the provision of incentives. Furthermore, since we can obtain first-order conditions for the principal’s optimization problem, we assess the accuracy of numerical solutions using the first-order conditions’ residuals. Finally, we compute the cost-minimizing contracts under different contractual arrangements and calculate the corresponding effects on the surplus of the principal and of the agent.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Firms, Courts, and Reputation Mechanisms: Towards a Positive Theory of Private Ordering
-
Authority and Commitment: Why Universities, Like Legislatures, are Not Organized as Firms
-
The Questionable Empirical Basis of Article 2's Incorporation Strategy: A Preliminary Study
-
Faculty Turnover at American Colleges and Universities: Analysis of Aaup Data
By Ronald G. Ehrenberg, Hirschel Kasper, ...
-
What is a Professional Service Firm? Towards a Theory and Taxonomy of Knowledge Intensive Firms
-
Rules Transparency and Political Accountability
By Massimo Bordignon and Enrico Minelli
-
From St. Ives to Cyberspace: The Modern Distortion of the Medieval 'Law Merchant'