What can we learn from simulating a standard agency model?

Research output: Contribution to journalArticlepeer-review


For typical parametrizations of the standard [Bell Journal of Economics 10 (1979) 74] 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.

Original languageEnglish (US)
Pages (from-to)137-146
Number of pages10
JournalEconomics Letters
Issue number2
StatePublished - Nov 2001
Externally publishedYes


  • C50
  • C61
  • C63
  • D82
  • Limited liability
  • Moral hazard
  • Numerical analysis
  • Reduced-form equation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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