Home > Research > Publications & Outputs > Dynamic Principal–Agent Models

Electronic data

View graph of relations

Dynamic Principal–Agent Models

Research output: Working paper

Published
Publication date11/2017
Place of PublicationLancaster
PublisherLancaster University, Department of Economics
<mark>Original language</mark>English

Publication series

NameEconomics Working Paper Series

Abstract

This paper contributes to the theoretical and numerical analysis of discrete time dynamic principal-agent problems with continuous choice sets. We first provide a new and simplified proof for the recursive reformulation of the sequential dynamic principal-agent relationship. Next we prove the existence of a unique solution for the principal's value function, which solves the dynamic programming problem in the recursive formulation. By showing that the Bellman operator is a contraction mapping, we also obtain a convergence result for the value function iteration. To compute a solution for the problem, we have to solve a collection of static principal{agent problems at each iteration. Under the assumption that the agent's expected utility is a rational function of his action, we can transform the bi-level optimization problem into a standard nonlinear program. The final results of our solution method are numerical approximations of the policy and value functions for the dynamic principal-agent model. We illustrate our solution method by solving variations of two prominent social planning models from the economics literature.