Dynamic Contracting with Many Agents

Bruno Biais (), Hans Gersbach, Jean Rochet, Ernst-Ludwig von Thadden and Stéphane Villeneuve ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. The state variables of the mechanism design problem are aggregate capital and the distribution of continuation utilities across agents. This gives rise to a Bellman equation in an infinite dimensional space, which we solve with mean-field techniques. We fully characterize the optimal mechanism and show that the level of risk agents must be exposed to for incentive reasons is decreasing in their initial outside utility. We extend classical welfare theorems by showing that any incentive-constrained optimal allocation can be implemented as an equilibrium allocation, with appropriate money issuance and wealth taxation by the principal.

Keywords: Incomplete Financial Markets; Debt; Interest; Growth; Ponzi Games; Heterogeneous Agents; Political Economy (search for similar items in EconPapers)
JEL-codes: E44 E62 (search for similar items in EconPapers)
Pages: 34
Date: 2024-03
New Economics Papers: this item is included in nep-cta, nep-dge, nep-fdg, nep-mic and nep-upt
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Related works:
Working Paper: Dynamic Contracting with Many Agents (2024)
Working Paper: Dynamic Contracting with Many Agents (2024)
Working Paper: Dynamic Contracting with Many Agents (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2023_412v2

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