A Stochastic Formulation for the Principal-Agent Model

(this was joint research with Jaeyoung Sung of the University of Illinois at Chicago)

We used martingale methods from stochastic optimal control to give a mathematically correct derivation of a characterization of an optimal sharing rule for the principal-agent problem in Economics. Our research settled some open questions about the generality of a linear sharing rule proposed by Holmstrom and Milgrom in (Econometrica, 55, p. 303-328, 1987).

Selected Publication:

* The First-Order Approach to the Continuous-Time Principal Agent Problem with Exponential Utility, J. of Economic Theory,  61, (2), pp. 331-371, 1993, (with J. Sung).