Abstract
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 language | English (US) |
|---|---|
| Pages (from-to) | 137-146 |
| Number of pages | 10 |
| Journal | Economics Letters |
| Volume | 73 |
| Issue number | 2 |
| DOIs | |
| State | Published - Nov 2001 |
| Externally published | Yes |
Keywords
- C50
- C61
- C63
- D82
- Limited liability
- Moral hazard
- Numerical analysis
- Reduced-form equation
ASJC Scopus subject areas
- Finance
- Economics and Econometrics