Sequential optimal contracting in continuous time

TL;DR

This paper analyzes a continuous-time principal-agent problem with multiple deterministic payments, reducing it to a stochastic control problem and exploring how various factors influence outcomes.

Contribution

It introduces a novel reduction of a multi-payment principal-agent game to a stochastic control framework in continuous time.

Findings

Payment frequency impacts principal’s value

Distribution of payments affects agent’s compensation

Discounting factors influence contract design

Abstract

In this paper we study a principal-agent problem in continuous time with multiple lump-sum payments (contracts) paid at different deterministic times. We reduce the non-zero sum Stackelberg game between the principal and agent to a standard stochastic optimal control problem. We apply our result to a benchmark model for which we investigate how different inputs (payment frequencies, payments' distribution, discounting factors, agent's reservation utility) affect the principal's value and agent's optimal compensations.