The risk-sharing problem under limited liability constraints in a single-period model

DOI10.1007/S10957-021-01861-8MaRDI QIDQ2046544zbMATH OpenOpenAlexFDO

Authors Jessica Martin

Publication date 18 August 2021

Published in Journal of Optimization Theory and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2005.05147

zbMATH Keywords

limited liabilityoptimization on Hilbert spacesprincipal-agent problemsrisk-sharing

Mathematics Subject Classification ID

Existence of optimal solutions to problems involving randomness (49J55) Contract theory (moral hazard, adverse selection) (91B41) Principal-agent models (91B43)

Abstract: This work provides analysis of a variant of the Risk-Sharing Principal-Agent problem in a single period setting with additional constant lower and upper bounds on the wage paid to the Agent. First the effect of the extra constraints on optimal contract existence is analyzed and leads to conditions on utilities under which an optimum may be attained. Solution characterization is then provided along with the derivation of a Borch rule for Limited Liability. Finally the CARA utility case is considered and a closed form optimal wage and action are obtained. This allows for analysis of the classical CARA utility and gaussian setting.

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Cites work

• A Continuous-Time Version of the Principal–Agent Problem
• Contract theory in continuous-time models
• Convex functional analysis
• Equilibrium in a Reinsurance Market
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• scientific article; zbMATH DE number 3227378 (Why is no real title available?)
• Limited liability and incentive contracting with ex-ante action choices
• Limited liability contracts between principal and agent
• Minimum payments and induced effort in moral hazard problems
• Moral hazard with bounded payments
• Renegotiating moral hazard contracts under limited liability and monotonicity
• The existence of optimal contracts in the principal-agent model
• The first-best sharing rule in the continuous-time principal-agent problem with exponential utility

Cited in

(6)

• Limited liability and the underlying-asset constraint: On the use of share-derivative contracts to resolve agency problems
• Diving gains between a client and her agent
• On the existence of share contracts under limited liability
• Influence of risk incentive by limited dividend provision
• The cost of moral hazard and limited liability in the principal-agent problem
• Characterization of a risk sharing contract with one-sided commitment

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