Robustness of a fixed-rent contract in a standard agency model (Q1762739): Difference between revisions

The paper examines whether the fixed-rent contract is robust or not in various circumstances. More specifically, the authors test the robustness of the fixed-rent contract by perturbing the standard framework in two different directions. First, they examine the robustness of the fixed-rent contract in terms of the agent's risk preferences by investigating whether the unique optimal incentive contract when the agent is risk-averse converges to the fixed-rent contract as the agent's risk-aversion approaches zero, and whether the difference between the principal's expected payoff from the optimal contract and that from the linear contract approaches zero as the agent's risk-aversion goes to zero. Then, then examine its robustness in terms of the agent's risk environments by investigating whether it remains to be first-best as the risk environments change.