Discrete-Time Approximations of the Holmstrom-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision

Martin F. Hellwig () and Klaus M. Schmidt ()
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Martin F. Hellwig: University of Mannheim
Klaus M. Schmidt: University of Munich

Econometrica, 2002, vol. 70, issue 6, 2225-2264

Abstract: This paper studies the relation between discrete-time and continuous-time principal-agent models. We derive the continuous-time model as a limit of discrete-time models with ever shorter periods and show that optimal incentive schemes in the discrete-time models approximate the optimal incentive scheme in the continuous model, which is "linear in accounts". Under the additional assumption that the principal observes only cumulative total profits at the end and the agent can destroy profits unnoticed, an incentive scheme that is "linear in total profits" is shown to be approximately optimal in the discrete-time model when the length of the period is small. Copyright The Econometric Society 2002.

Date: 2002
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Related works:
Working Paper: Discrete-time approximations of the Holmström-Milgrom brownian-motion model of intertemporal incentive provision (2002)
Working Paper: Discrete-Time Approximations of the Holmström-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision (2001)
Working Paper: Discrete-Time Approximations of the Holmström-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision (2001)
Working Paper: Discrete-time approximations of the Holmström-Milgrom Brownian-motion model of intertemporal incentive provision (1998)
Working Paper: Discrete-Time Approximations of the Holmström-Milgrom Brownian-Motion, Model of Intertemporal Incentive Provision (1998)
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