First-Best Contracts for Continuous-Time Principal-Agent Problems
نویسندگان
چکیده
In this paper we present a unified approach to solving principal-agent problems with full information in models driven by Brownian Motion. We apply the stochastic maximum principle to give necessary and sufficient conditions for contracts that implement the so-called first-best solution. The optimal contract is proportional to the difference between the underlying process controlled by the agent and a stochastic, state-contingent benchmark. Our methodology covers a number of frameworks considered in the existing literature. The main finance applications of this theory are optimal compensation of company executives and of portfolio managers.
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