Gaussian Agency problems and Linear Contracts
A talk in the Bielefeld Stochastic Afternoon series by
Stéphane Villeneuve
| Abstract: | $$\textbf{Bielefeld Stochastic Afternoon - Math Finance Session}$$
How to explain the use of dynamic contracts which are linear in end-of-period outputs when the agent controls a process that exhibits memory? This paper addresses this question by extending the classical model of Holmstrom-Milgrom (1987) to general Gaussian settings where the output dynamics are neither semi-martingales, nor Markov processes. The class of principal-agent models we introduce is rich enough to encompass dynamic agency models with memory and also allows us to go beyond the usual continuous-time framework which generally solves for the optimal contract by the means of a Hamilton-Jacobi-Bellman equation. Our main contribution is to show that this setting allows surprisingly for optimal linear contracts in observable outcomes with a non constant optimal level of effort.
Joint work with Eduardo Abi Jaber from Université Pantheon-Sorbonne. Within the CRC this talk is associated to the project(s): C3, C4, C5 |