Discrete-time approximations of the Holmström-Milgrom Brownian-motion model of intertemporal incentive provision

Martin Hellwig and Klaus Schmidt ()

No 98-06, Papers from Sonderforschungsbreich 504

Abstract: This paper studies the relation between multi-period discrete-time and continuous-time principal-agent models. We explicitly derive the continuous-time model as a limit of discrete-time models with ever shorter periods and show that the optimal incentive scheme in the continuous model, which is linear in accounts, can be approximated by a sequence of optimal incentive schemes in the discrete models. For a variant of the discrete-time model in which the principal observes only total profits at the end of the last period and where the agent can destroy profits unnoticed we show, that if the length of each period is sufficiently small, then an incentive scheme that is linear in total profits is approximately optimal.

Keywords: Principal-agent problems; linear incentive schemes; intertemporal incentive provision; Brownian motion (search for similar items in EconPapers)
JEL-codes: C61 D82 J33 (search for similar items in EconPapers)
Date: 1998
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https://madoc.bib.uni-mannheim.de/2884/1/dp98_06.pdf

Related works:
Journal Article: Discrete-Time Approximations of the Holmstrom-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 (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)
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