Discrete-time approximations of the Holmström-Milgrom Brownian-motion model of intertemporal incentive provision


Hellwig, Martin ; Schmidt, Klaus M.


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URL: https://ub-madoc.bib.uni-mannheim.de/2884
URN: urn:nbn:de:bsz:180-madoc-28849
Document Type: Working paper
Year of publication: 1998
The title of a journal, publication series: Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung
Volume: 98-06
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: J33 D82 C61 ,
Subject headings (SWD): Agency-Theorie , Anreizsystem , Intertemporale Allokation , Stochastischer Prozess
Keywords (English): Principal-agent problems , linear incentive schemes , intertemporal incentive provision , Brownian motion
Abstract: This paper studies the relation between multi-period discrete-time and continuous-time principal-agent models. We explicitly derive the continuous-time model as a limit of discrete-time models with ever shorter periods and show that the optimal incentive scheme in the continuous model, which is linear in accounts, can be approximated by a sequence of optimal incentive schemes in the discrete models. For a variant of the discrete-time model in which the principal observes only total profits at the end of the last period and where the agent can destroy profits unnoticed we show, that if the length of each period is sufficiently small, then an incentive scheme that is linear in total profits is approximately optimal.
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Hellwig, Martin ; Schmidt, Klaus M. (1998) Discrete-time approximations of the Holmström-Milgrom Brownian-motion model of intertemporal incentive provision. Open Access Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung Mannheim 98-06 [Working paper]
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