A two-dimensional control problem arising from dynamic contracting theory

Jean-Paul Décamps and Stéphane Villeneuve

No 880, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: We study a corporate finance dynamic contracting model in which the firm's growth rate fluctuates and is impacted by the unobservable effort exercised by the manager. We show that the principal's problem takes the form of a two-dimensional Markovian control problem. We prove regularity properties of the value function that are instrumental in the construction of the optimal contract that implements full effort, which we derive explicitly. These regularity results appear in some recent economic studies but with heuristic proofs that do not clarify the importance of the regularity of the value function at the boundaries.

Keywords: Principal-agent problem; two-dimensional control problem; regularity properties (search for similar items in EconPapers)
JEL-codes: G30 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cfn, nep-cta and nep-mic
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Related works:
Journal Article: A two-dimensional control problem arising from dynamic contracting theory (2019)
Working Paper: A two-dimensional control problem arising from dynamic contracting theory (2019)
Working Paper: A two-dimensional control problem arising from dynamic contracting theory (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ide:wpaper:32396

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