Contract Theory: Discrete- And Continuous-Time Models

ISBN-13: 9789819954865 / Angielski

Jaeyoung Sung

Spis treści

Introduction

1 Incentive Problems

1.1 Main Issues in Contracting

1.2 The principal’s problem

1.3 Agency Problems in Corporate Finance

1.4 Empirical evidences on managerial compensation

2 Basic Structures of Contracting Problems

2.1 The First Best Problem

2.1.1 Certainty case

2.1.2 Uncertainty case

2.2 The second-best problem

2.2.1 Social planner’s problem

2.3 Exercises

3 Discrete-Time Formulation I 33

3.1 The First-Best Contract

3.2 The Second Best Contract

3.2.1 Risk-neutral Agent

3.2.2 Risk-Averse Agent

3.3 Remarks on the discrete-time and binomial-outcome model

3.4 Notes

3.5 Exercises

4 Discrete-Time Formulation II

4.1 The First Best

4.2 The Second Best

4.2.1 The First-Order Approach

4.2.2 The Shape of the Second-Best Contract

4.2.3 The Value of Informative Signal in Contracting

4.2.4 Summary

4.3 The Validity of the First-order Approach

4.3.1 The First-Order Approach with a Normally-Distributed Outcome

4.3.2 Normally Distributed Outcome

4.4 Notes

4.5 Exercises

5 Contracting in Continuous Time: Time-Multiplicative Pref-

erences

5.1 The Model

5.2 The representation of admissible contracts

5.3 The First Best

5.3.1 The First-Best Solution with a General Outcome Process

5.4 Second-best Contracting

5.4.1 The Agent’s Problem

5.4.2 The Principal’s Problem

5.4.3 The Second-best Solution with a General Non-Markovian

Outcome Process

5.5 Application to Managerial Compensation

5.6 Notes

5.7 Exercises

6 Optimal Performance Metrics

6.1 Relative Performance Evaluation (RPE)

6.1.1 RPE in the Presence of Financial Markets

6.2 Notes

6.3 Exercises

7 Contracting under Incomplete Information

7.1 Case I: dθt = 0

7.2 Case II: a(t) = a and b(t) = b

7.3 Notes

7.4 Exercises

8 Career Concerns in Competitive Labor Markets

8.1 The Model

8.2 Agent’s Problem and Market Expectation

8.3 Principal’s Problem

8.4 Notes

8.5 Exercises

9 Agency Problem in Weak Formulation

9.1 The Agent’s Problem

9.2 The Principal’s Problem

9.2.1 Markovian Outcome

9.3 Notes

10 Contracting with a Mean-Volatility Controlled Outcome

10.1 The Agent’s Mean-Volatility Control Problem

10.2 Principal’s Problem: Observable Volatility

10.2.1 Markovian Outcome

10.3 Unobservable Volatility

10.4 Comparing Observable and Unobservable Project Decisions

10.4.1 Unobservable volatility case II

10.5 Notes

10.6 Exercises

11 Hierarchical Contracting: A Mean-Volatility Control Problem

11.1 The Model

11.2 Optimal Performance-Based Contracts

11.3 Profit Sharing under Hierarchical Contracting

11.3.1 Middle Managerial Contracts

11.3.2 Top Managerial Contract

11.4 Notes

11.5 Exercises

12 Contracting in Continuous Time: Time-Additive Preferences

12.1 The Model

12.2 The First Best

12.3 The Second Best

12.4 Notes

12.5 Exercises

13 Contracting under Ambiguity: Introduction

13.1 Additional remarks on risk and ambiguity

13.1.1 True vs. Perceived Distributions

13.1.2 A submartingle property

13.1.3 Learning from each other

13.2 A discrete-time model

13.3 The Structure of Optimal Contracts

13.4 The First-Best Contract

13.5 The Second-Best Contract

13.6 Notes

13.7 Exercises

14 Contracting under Ambiguity in Continuous Time

14.1 The Principal-Agent Problems

14.2 Representation of Admissible Contracts

14.2.1 Why the K Process?: A Digression

14.3 First-Best Contracting

14.4 Second-Best Contracting

14.4.1 Incentive Compatibility

14.4.2 Principal’s Problem

14.5 A Linear-Quadratic Case

14.6 Notes

14.7 Exercises

15 Information Asymmetry: Adverse Selection

15.1 The Model: Pure Adverse Selection

15.2 The Two-Type Case

15.2.1 The first best

15.2.2 Asymmetric information: The second best

15.2.3 Intuition

15.3 Continuum of Types

15.4 Notes

16 Adverse Selection and Moral Hazard

16.1 Continuous-Time Contracting

16.2 The Principal’s Problem

16.3 Notes

A

A.1 A Brief Review on Stochastic Calculus

A.2 Dynamic Programming Equation with Exponential Utility

A.3 Martingale Method

A.3.1 Integral Objective

A.3.2 Exponential Objective

A.4 Mean-Volatility Control in Weak Formulation

A.4.1 Admissible Probability Measures

A.4.2 The mean-volatility control problem

O autorze

Jaeyoung Sung is currently Professor Emeritus of Finance at Ajou University, South Korea. He served as principal investigator of the WCU (World Class University) project to establish a world-class financial engineering program at Ajou University. He also taught at University of Illinois at Chicago, and he was visiting professor at Washington University in St. Louis, University of New South Wales, and University of Southern California. His research interests lie in agency theory, asset pricing and market microstructure. He has published on continuous-time agency problems in economics and finance journals such as Journal of Economic Theory, Rand Journal of Economics, Review of Financial Studies, Mathematical Finance, and others.

Blurb

This book provides a self-contained introduction to discrete-time and continuous-time models in contracting theory to advanced undergraduate and graduate students in economics and finance and researchers focusing on closed-form solutions and their economic implications. Discrete-time models are introduced to highlight important elements in both economics and mathematics of contracting problems and to serve as a bridge for continuous-time models and their applications. The book serves as a bridge between the currently two almost separate strands of textbooks on discrete- and continuous-time contracting models

This book is written in a manner that makes complex mathematical concepts more accessible to economists. However, it would also be an invaluable tool for applied mathematicians who are looking to learn about possible economic applications of various control methods.