The First-Best Sharing Rule in the Continuous-Time Principal-Agent Problem with Exponential Utility

Holger M. Müller ()
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Holger M. Müller: Department of Economics, University of Mannheim, Postal: A5, Room A237, 68131 Mannheim, Germany

No 97-38, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

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.

Pages: 5 pages
Date: 1997-10-01
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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