What can we learn from simulating a standard agency model? (Q5958676): Difference between revisions
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Property / cites work: Justifying the First-Order Approach to Principal-Agent Problems / rank | |||
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Revision as of 23:27, 3 June 2024
scientific article; zbMATH DE number 1715717
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English | What can we learn from simulating a standard agency model? |
scientific article; zbMATH DE number 1715717 |
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What can we learn from simulating a standard agency model? (English)
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3 March 2002
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For typical parametrizations of the standard 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.
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Moral hazard
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Numerical analysis
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Reduced-form equation
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Limited liability
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