What Can We Learn From Simulating a Standard Agency Model?

Michel Robe

No 98, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: For typical parametrizations of the standard Holmstrom (1979) agency model, this paper demonstrates that the set of first-order conditions characterizing the optimal contract can be reduced to a single equation. A problem of investment financing under moral hazard is used to illustrate the reduced-form equation's usefulness in quantitative applications. When the agent has CARA preferences over consumption, it is shown that any exogenous limit on the penalties for low output is always binding.

Keywords: Moral Hazard; Numerical Analysis; Reduced-Form Equation; Limited Liability. (search for similar items in EconPapers)
JEL-codes: C50 C61 D82 (search for similar items in EconPapers)
Date: 2001-04-01
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Citations: View citations in EconPapers (7)

Forthcoming, Economics Letters, 73 (2), pp. 136-147, November 2001

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