Barlo, Mehmet and Ozdogan, Ayca (2011): Optimality of linearity with collusion and renegotiation.

PDF
MPRA_paper_35548.pdf Download (229kB)  Preview 
Abstract
This study analyzes a continuoustime Nagent Brownian hiddenaction model with exponential utilities, in which agents' actions jointly determine the mean and the variance of the outcome process. In order to give a theoretical justi¯cation for the use of linear contracts, as in Holmstrom and Milgrom (1987), we consider a variant of its generalization given by Sung (1995), into which collusion and renegotiation possibilities among agents are incorporated. In this model, we prove that there exists a linear and stationary optimal compensation scheme which is also immune to collusion and renegotiation.
Item Type:  MPRA Paper 

Original Title:  Optimality of linearity with collusion and renegotiation 
Language:  English 
Keywords:  Principalagent problems; moral hazard; linear contracts; continuoustime model; Brownian motion martingale method; collusion,; renegotiation; team 
Subjects:  D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D86  Economics of Contract: Theory D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D82  Asymmetric and Private Information ; Mechanism Design C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61  Optimization Techniques ; Programming Models ; Dynamic Analysis C  Mathematical and Quantitative Methods > C7  Game Theory and Bargaining Theory > C73  Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games 
Item ID:  35548 
Depositing User:  Mehmet Barlo 
Date Deposited:  23. Dec 2011 16:06 
Last Modified:  23. Sep 2015 02:42 
References:  Barlo, M., and A. Ozdogan (2008): Teamwork beats collusion, Work in progress. Bone, J. (1998): RiskSharing CARA individuals are collectively EU, Economics Letters, 58, 311317 Cvitanic, J., X. Wan, and J. Zhang (2005): ContinuousTime PrincipalAgent Problems with Hidden Action: The Weak Formulation, working paper, California Technology of Institute. Grossman, S., and O. Hart (1983): An Analysis of the PrincipalAgent Problem, Econometrica, 51, 745. Hellwig, M., and K. M. Schmidt (2002): DiscreteTime Approximations of the HolmstromMilgrom BrownianMotion Model of Intertemporal Incentive Provision, Econometrica, 70(6), 22252264. Holmstrom, B. (1982): Moral Hazard in Teams, Bell Journal of Economics, 13, 324340. Holmstrom, B., and P. Milgrom (1987): Aggregation and Linearity in the Provision of Intertemporal Incentives, Econometrica, 55(2), 30328. Holmstrom, B., and P. Milgrom (1990): Regulating the trade among agents, Journal of Institutional and Theoretical Economics, 146, 85105. Itoh, H. (1993): Coalitions, Incentives and Risk Sharing, Journal of Economic Theory, 60, 410427. Jewitt, I. (1988): Justifying the Firstorder approach to principalagent problems, Econometrica, 56, 11771190. Koo, H. K., G. Shim, and J. Sung (2008): Optimal MultiAgent Performance Measures for Team Contracts, Mathematical Finance, 18(4), 649667. Lafontaine, F. (1992): Agency Theory and Franchising: Some Empirical Results," Rand Journal of Economics, 23, 263283. Mirlees, J. (1974): Notes on Welfare Economics, Information and Uncertainty, in Essays on Economic Behavior Under Uncertainty, ed. by M. Balch, D. McFadden, and S. Y. Wu. North Holland Publishing Co., Amsterdam. Mirrlees, J. A. (1975): The theory of moral hazard and unobservable behavior, Part I, Mimeo, Nuffield College, Oxford. Rogerson, W. (1985): The First Order Approach to PrincipalAgent Problem, Econometrica, 53, 13571368. Sannikov, Y. (2008): A ContinuousTime Version of the PrincipalAgent Problem, Review of Economic Studies, 75, 957984. Schattler, H., and J. Sung (1993): The FisrtOrder Approach to the ContinuousTime PrincipalAgent Problem with Exponential Utility, Journal of Economic Theory, 61, 331371. Schattler, H., and J. Sung (1997): On Optimal Sharing Rules in Discrete and ContinuousTime PrincipalAgent Problems with Exponential Utility, Journal of Economic Dynamics and Control, 21, 551574. Slade, M. E. (1996): Multitask Agency Contract Choice: An Empirical Exploration," International Economic Review, 37(2), 465486. Sung, J. (1995): Linearity with Project Selection and Controllable Diffusion Rate in ContinuousTime PrincipalAgent Problems, Rand Journal of Economics, 26(4), 720743. Varian, H. R. (1990): Monitoring agents with other agents, Journal of Institutional and Theoretical Economics, 146, 153174. Williams, N. (2003): On Dynamic PrincipalAgent Problems in ContinuousTime, working paper, Priceton University. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/35548 