The first-best sharing rule in the continuous-time principal-agent problem with exponential utility

Holger M. Müller

No 97-38, Papers from Sonderforschungsbreich 504

Abstract: The continuous-time principal-agent model with exponential utility developed by Holmström and Milgrom (1987) admits a simple closed-form solution: The second-best sharing rule is a linear function of aggregated output. Here, we show that the first-best sharing rule is also linear in aggregated output. The result follows immediately from the separability of the problem and the fact that principal and agent both have CARA utility.

Date: 1997
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