Abstract
The main message of this chapter is that for Principal–Agent problems in which volatility is controlled, as is the case in portfolio management, the first best outcome may be attainable by relatively simple contracts. These may be offered either as those in which the principal “sells” the whole output to the agent for a random “benchmark” amount, and/or as a possibly nonlinear function of the final value of the output. It is not necessary that the agent’s actions are observed. Only the final value of the output and, possibly, the final value of the underlying risk process (Brownian motion) need to be observed.
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Notes
- 1.
The terminology comes from the option pricing theory.
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Cvitanić, J., Zhang, J. (2013). Linear Models with Project Selection, and Preview of Results. In: Contract Theory in Continuous-Time Models. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-14200-0_3
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DOI: https://doi.org/10.1007/978-3-642-14200-0_3
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