A two-dimensional control problem arising from dynamic contracting theory

Décamps, Jean-Paul and Villeneuve, Stéphane (2019) A two-dimensional control problem arising from dynamic contracting theory. Finance and Stochastics. (In Press)

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Official URL: http://tse-fr.eu/pub/32979


We study a corporate finance dynamic contracting model in which the firm's growth rate fluctuates and is impacted by the unobservable effort exercised by the manager. We show that the principal's problem takes the form of a two-dimensional Markovian control problem. We prove regularity properties of the value function that are instrumental in the construction of the optimal contract that implements full effort, which we derive explicitly. These regularity results appear in some recent economic studies but with heuristic proofs that do not clarify the importance of the regularity of the value function at the boundaries.

Item Type: Article
Language: English
Date: 2019
Refereed: Yes
Place of Publication: Berlin
Uncontrolled Keywords: Principal-agent problem, two-dimensional control problem, regularity properties
JEL codes: G30 - General
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 02 Oct 2018 07:52
Last Modified: 21 Jan 2019 13:38
OAI ID: oai:tse-fr.eu:32979
URI: http://publications.ut-capitole.fr/id/eprint/26294

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