A dynamic principal-agent problem as a feedback Stackelberg differential game

We consider situations in which a principal tries to induce an agent to spend effort on accumulating a state variable that affects the well-being of both parties. The only incentive mechanism that the principal can use is a state-dependent transfer of her own utility to the agent. Formally, the model is a Stackelberg differential game in which the players use feedback strategies. Whereas in general Stackelberg differential games with feedback strategy spaces the leader’s optimization problem has non-standard features that make it extremely hard to solve, in the present case this problem can be rewritten as a standard optimal control problem. Two examples are used to illustrate our approach. Journal of Economic Literature classification codes: C61, C73, D82