Wealth-Robust Intertemporal Incentive Contracts

Mark Loewenstein, Jerome Detemple and Suresh Govindaraj

No 171, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: We study optimal incentive contracts in a continuous time principal-agent setting with hidden actions. The agent, whose effort controls the output, has a concave utility function which is non-separable in wealth and monetary cost of effort. The principal is risk neutral and optimally selects the effort to be induced and the contract design. Output follows a mean-reverting process with random coefficients. We characterize the class of W-robust compensation schemes that elicit a desired effort which is immune to the principal's mispecifications of the future wealth of the manager. We demonstrate the existence of a solution to the principal's problem, characterize the optimal effort policy, derive the optimal W-robust contract and show that our contract dominates randomized contracts

Keywords: Hidden Actions; Intertemporal Contracts; Principal-Agent; Wealth Robust Contracts. (search for similar items in EconPapers)
JEL-codes: C61 D82 J33 (search for similar items in EconPapers)
Date: 2005-11-11
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:171

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