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Principal-Agent Problems with Exit Options
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Jaksa Cvitanic
Published/Copyright:
October 6, 2008
We consider the problem of when to deliver the contract payoff, in a continuous-time principal-agent setting, in which the agent's effort is unobservable. The principal can design contracts of a simple form that induce the agent to ask for the payoff at the time of the principal's choosing. The optimal time of payment depends on the agent's and the principal's outside options. We develop a theory for general utility functions, while with CARA utilities we are able to specify conditions under which the optimal payment time is not random. However, in general, the optimal payment time is typically random. One illustrative application is the case when the agent can be fired, after having been paid a severance payment, and then replaced by another agent. The methodology we use is the stochastic maximum principle and its link to Forward-Backward Stochastic Differential Equations.
Keywords: principal-agent problems; real options; exit decisions; forward backward stochastic differential equations
Published Online: 2008-10-6
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
principal-agent problems;
real options;
exit decisions;
forward backward stochastic differential equations
Articles in the same Issue
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- When Stackelberg and Cournot Equilibria Coincide
- Conflict and Consensus: A Theory of Control in Organisations
- Backward Integrated Information Gatekeepers and Independent Divisions in the Product Market
- Identification of Individual Demands from Market Data under Uncertainty
- On the Role of Uncertainty in the Risk-Incentives Tradeoff
- Time-to-Build and the Inverse U-Shape Investment-Uncertainty Relationship
- Revisiting Independence and Stochastic Dominance for Compound Lotteries
- On Competitive Equilibria with Asymmetric Information
- A Duopoly Location Toolkit: Consumer Densities Which Yield Unique Spatial Duopoly Equilibria
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- Global vs. Local Information in (Anti-)Coordination Problems with Imitators
- Costly Evidence Production and the Limits of Verifiability
- Research Joint Ventures, Optimal Licensing, and the R&D Subsidy Policy
- Comparative Statics and Welfare in Heterogeneous All-Pay Auctions: Bribes, Caps, and Performance Thresholds
- Ex Post Private Information and Monopolistic Screening
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