Villeneuve, Stéphane and Martin, Jessica (2021) A class of explicit optimal contracts in the face of shutdown. TSE Working Paper, n. 21-1183, Toulouse

Warning
There is a more recent version of this item available.
[thumbnail of wp_tse_1183.pdf]
Preview
Text
Download (559kB) | Preview

Abstract

What type of delegation contract should be offered when facing a risk of the magnitude of the pandemic we are currently experiencing and how does the likelihood of an exogenous early termination of the relationship modify the terms of a full-commitment contract? We study these questions by considering a dynamic principal-agent model that naturally extends the classical Holmström-Milgrom setting to include a risk of default whose origin is independent of the inherent agency problem. We obtain an explicit characterization of the optimal wage along with the optimal action provided by the agent. The optimal contract is linear by offering both a fixed share of the output which is similar to the standard shutdown-free Holmström-Milgrom model and a linear prevention mechanism that is proportional to the random lifetime of the contract. We then tweak the model to add a possibility for risk mitigation through investment and study its optimality.

Item Type: Monograph (Working Paper)
Language: English
Date: January 2021
Place of Publication: Toulouse
Uncontrolled Keywords: Principal-Agent problems, shutdown risk, Hamilton-Jacobi Bellman equations
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 04 Mar 2021 13:42
Last Modified: 17 Jul 2023 12:27
OAI Identifier: oai:tse-fr.eu:125189
URI: https://publications.ut-capitole.fr/id/eprint/42331

Available Versions of this Item

View Item

Downloads

Downloads per month over past year