A Continuous-Time Version of the Principal–Agent Problem

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. The 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 reaches a point that triggers retirement, quitting, replacement, or promotion. The paper explores how the dynamics of the agent's wages and effort, as well as the optimal mix of short-term and long-term incentives, depend on the contractual environment.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 719 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.