The General Risk Sharing Problem

Jakša Cvitanić and Jianfeng Zhang
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Jakša Cvitanić: California Institute of Technology
Jianfeng Zhang: University of Southern California

Chapter Chapter 4 in Contract Theory in Continuous-Time Models, 2013, pp 25-43 from Springer

Abstract: Abstract In this chapter we consider general diffusion dynamics for the output process with a general cost function depending on the agent’s actions and/or the output values. The main qualitative conclusions from the case of linear drift dynamics of the previous section still hold true with nonlinear drift dynamics—a linear benchmark contract is optimal, and it implements the first best actions. However, the benchmark is now harder to identify, and it may be obtained either as an adjoint process which is a part of a solution to an FBSDE, or as a solution to an appropriate dual problem. The model is also extended to include consumption processes of the principal and the agent, and to the case of so-called recursive utilities, that generalize standard utility functions.

Keywords: Dual Problem; Optimal Contract; Portfolio Selection Problem; Exponential Utility; Linear Contract (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-642-14200-0_4

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DOI: 10.1007/978-3-642-14200-0_4

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