The Principal-Agent Problem; A Stochastic Maximum Principle Approach

Understand

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.