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The Principal-Agent Problem; A Stochastic Maximum Principle Approach (1410.6392v2)
Published 23 Oct 2014 in math.OC
Abstract: We study a general class of Principal-Agent problems in continuous time under hidden action. By formulating the model as a coupled stochastic optimal control problem we are able to find a set of necessary conditions characterizing optimal contracts, using the stochastic maximum principle. An example is carried out to illustrate the proposed approach to the Principal-Agent problem under linear stochastic dynamics with a quadratic performance function.
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