Asymptotic Efficiency in Dynamic Principal-Agent Problems

In a seminal paper, B. R. Holmström and P. R. Milgrom (1987, Econometrica55, 303–328) examine a principal-agent model in which the agent continuously controls the drift rate of a Brownian motion. Given a stationary environment, they show that the optimal sharing rule is a linear function of aggregat...

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Bibliographic Details
Published in:Journal of economic theory 2000-04, Vol.91 (2), p.292-301
Main Author: Muller, Holger M
Format: Article
Language:English
Subjects:
Agency theory
Dynamic models
Economic efficiency
Economic models
Economic theory
Mathematical economics
Principal-agent theory
Studies
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Summary:In a seminal paper, B. R. Holmström and P. R. Milgrom (1987, Econometrica55, 303–328) examine a principal-agent model in which the agent continuously controls the drift rate of a Brownian motion. Given a stationary environment, they show that the optimal sharing rule is a linear function of aggregated output. This paper considers a variant of the Brownian model in which control revisions take place in discrete time. It is shown that no matter how “close” discrete time is to continuous time, the first-best solution can be approximated arbitrarily closely with a random spot check and a suitably chosen sequence of step functions. Journal of Economic Literature Classification Numbers: D82, J33.
ISSN:0022-0531
1095-7235
DOI:10.1006/jeth.1999.2623