Abstract
In this chapter we consider simple examples in one-period models, whose continuous versions will be studied later in the book. Principal–Agent problems in single-period models become more tractable if exponential utility functions are assumed. However, even then, there are cases in which tractability requires considering only linear contracts. Optimal contracts which cannot contract upon the agent’s actions are more sensitive to the output than those that can. When the agents’ type is unknown to the principal, the agents of “higher” type may have to be paid more to make them reveal their type.
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Notes
- 1.
Given a utility function U, certainty equivalent CE of a random variable X is a real number such that U(CE)=E[U(X)].
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Cvitanić, J., Zhang, J. (2013). Single-Period Examples. In: Contract Theory in Continuous-Time Models. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-14200-0_2
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DOI: https://doi.org/10.1007/978-3-642-14200-0_2
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-14199-7
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