assignmentnine

assignmentnine - Economics 206 Spring 2007 (Prof. G. Loury)...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 206 Spring 2007 (Prof. G. Loury) Assignment 8: The Principal-Agent Problem (1) A principal needs to contract with an agent to get a risky project done. The project can either succeed or fail. If it succeeds it generates output with gross value V> 0 . If it fails, it’s output is worth 0 . The probability of success depends on the e f ort exerted by the agent. Let e 0 denote the agent’s e f ort, and let p ( e ) (0 , 1) be the probability of success given level of e f ort e . Assume that p ( e ) is strictly increasing, strictly concave, and satis f es: p (0) = 0 ; p 0 ( e ) →∞ as e 0 ; p 0 ( e ) 0 as e →∞ ,and p ( e ) 1 as e →∞ .E f ort of the agent is assumed not to be observable by the principal. A contract is simply a pair of numbers ( w 0 ,w 1 ) specifying what the principal pays the agent in the event of the project’s success ( w 1 ) or failure ( w 0 ). The principal is risk π neutral and seeks to maximize the expected payo f from the project, net of payments to the agent. The agent’s preferences are given by:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

assignmentnine - Economics 206 Spring 2007 (Prof. G. Loury)...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online