Continuous-time incentives in hierarchies
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Publication:6166333
DOI10.1007/S00780-023-00506-0zbMATH Open1518.91117arXiv2007.10758OpenAlexW3122637290MaRDI QIDQ6166333FDOQ6166333
Authors: Emma Hubert 
Publication date: 6 July 2023
Published in: Finance and Stochastics (Search for Journal in Brave)
Abstract: This paper studies continuous-time optimal contracting in a hierarchy problem which generalises the model of Sung (2015). The hierarchy is modeled by a series of interlinked principal-agent problems, leading to a sequence of Stackelberg equilibria. More precisely, the principal can contract with the managers to incentivise them to act in her best interest, despite only observing the net benefits of the total hierarchy. Managers in turn subcontract with the agents below them. Both agents and managers independently control in continuous time a stochastic process representing their outcome. First, we show through a continuous-time adaptation of Sung's model that, even if the agents only control the drift of their outcome, their manager controls the volatility of their continuation utility. This first simple example justifies the use of recent results on optimal contracting for drift and volatility control, and therefore the theory of second-order backward stochastic differential equations, developed in the theoretical part of this paper, dedicated to a more general model. The comprehensive approach we outline highlights the benefits of considering a continuous-time model and opens the way to obtain comparative statics. We also explain how the model can be extended to a large-scale principal-agent hierarchy. Since the principal's problem can be reduced to only an -dimensional state space and a -dimensional control set, where is the number of managers immediately below her, and is therefore independent of the size of the hierarchy below these managers, the dimension of the problem does not explode.
Full work available at URL: https://arxiv.org/abs/2007.10758
Recommendations
Applications of stochastic analysis (to PDEs, etc.) (60H30) Hierarchical games (including Stackelberg games) (91A65) Contract theory (moral hazard, adverse selection) (91B41) Principal-agent models (91B43)
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Cited In (8)
- Timing of Effort and Reward: Three-Sided Moral Hazard in a Continuous-Time Model
- Optimal incentives and the time dimension of performance measurement
- Pay for performance under hierarchical contracting
- Efficiency of the rank-order incentive systems
- Principal-multiagents problem under equivalent changes of measure: general study and an existence result
- The design of reward structures in career games: a relative deprivation approach
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- Piecewise Linear Incentive Schemes
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