Principal-Agent Problems with Hidden Savings in Continuous Time

Tomoyuki Nakajima

No CIRJE-F-1182, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: In this paper, we consider a continuous-time principal-agent problem with hidden savings. The agent’s problem, which is non-Markovian, is formulated using the stochas- tic HJB equation. Without loss of generality, attention is restricted to those contracts for which the agent optimally chooses zero savings. Then, the principal’s problem can be ex- pressed as maximizing her expected profit subject to two SDEs: one equation describing the agent’s continuation utility process, and the other being the Euler equation concern- ing the agent’s marginal utility process. It coincides with the formulation obtained under the first-order approach.

Pages: 28 pages
Date: 2021-12
New Economics Papers: this item is included in nep-ore and nep-upt
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