A two-dimensional control problem arising from dynamic contracting theory

Jean-Paul Décamps and Stéphane Villeneuve ()
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Stéphane Villeneuve: University of Toulouse Capitole (TSM-R)

Finance and Stochastics, 2019, vol. 23, issue 1, No 1, 28 pages

Abstract: Abstract We study a dynamic corporate finance contracting model in which the firm’s profitability fluctuates and is impacted by the unobservable managerial effort. Thereby, we introduce in an agency framework the issue of strategic liquidation. We show that the principal’s problem takes the form of a two-dimensional fully degenerate Markov control problem. We prove regularity properties of the value function and derive explicitly the optimal contract that implements full effort. Our regularity results appear in some recent 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; 49L20; 60G40; 91G50 (search for similar items in EconPapers)
JEL-codes: G30 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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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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DOI: 10.1007/s00780-018-0376-4

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