EconPapers    
Economics at your fingertips  
 

Continuous-time incentives in hierarchies

Emma Hubert

Papers from arXiv.org

Abstract: This paper studies continuous-time optimal contracting in a hierarchy problem which generalises the model of Sung (2015). The hierarchy is modeled by a series of interlinked principal-agent problems, leading to a sequence of Stackelberg equilibria. More precisely, the principal can contract with the managers to incentivise them to act in her best interest, despite only observing the net benefits of the total hierarchy. Managers in turn subcontract with the agents below them. Both agents and managers independently control in continuous time a stochastic process representing their outcome. First, we show through a continuous-time adaptation of Sung's model that, even if the agents only control the drift of their outcome, their manager controls the volatility of their continuation utility. This first simple example justifies the use of recent results on optimal contracting for drift and volatility control, and therefore the theory of second-order backward stochastic differential equations, developed in the theoretical part of this paper, dedicated to a more general model. The comprehensive approach we outline highlights the benefits of considering a continuous-time model and opens the way to obtain comparative statics. We also explain how the model can be extended to a large-scale principal-agent hierarchy. Since the principal's problem can be reduced to only an $m$-dimensional state space and a $2m$-dimensional control set, where $m$ is the number of managers immediately below her, and is therefore independent of the size of the hierarchy below these managers, the dimension of the problem does not explode.

Date: 2020-07
New Economics Papers: this item is included in nep-cta, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://arxiv.org/pdf/2007.10758 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2007.10758

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().

 
Page updated 2020-09-08
Handle: RePEc:arx:papers:2007.10758