title   
  

Optimality of linearity with collusion and renegotiation

Barlo, Mehmet and Özdoğan, Ayça (2014) Optimality of linearity with collusion and renegotiation. (Accepted/In Press)

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Abstract

This study analyzes a continuous–time N–agent Brownian moral hazard model with constant absolute risk aversion (CARA) utilities, in which agents’ actions jointly determine the mean and variance of the outcome process. In order to give a theoretical justification for the use of linear contracts, as in Holmstrom and Milgrom (1987), we consider a variant of its generalization given by Sung (1995), into which collusion and renegotiation possibilities among agents are incorporated. In this model, we prove that there exists a linear and stationary optimal compensation scheme which is also immune to collusion and renegotiation.
Item Type: Article
Uncontrolled Keywords: Principal–agent problems, moral hazard, linear contracts, continuous–time model, Brownian motion, martingale method, collusion, renegotiation, team
Subjects: H Social Sciences > HB Economic Theory > HB135-147 Mathematical economics. Quantitative methods
H Social Sciences > HB Economic Theory
Divisions: Faculty of Arts and Social Sciences > Academic programs > Economics
Faculty of Arts and Social Sciences
Depositing User: Mehmet Barlo
Date Deposited: 07 May 2014 15:33
Last Modified: 26 Apr 2022 09:13
URI: https://research.sabanciuniv.edu/id/eprint/24194

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