Dynamic Mean - Preserving Spreads and the Agency Problem
Daniele Rinaldo, Ph.D. Candidate in Development EconomicsBrown Bag Lunch
Shekhar Hari Kumar
We consider a problem of finding optimal contracts in a principal/agent model when the observable output is driven by a non-Gaussian, mean-preserving noise source, in which the agent's actions increase the drift of the output process and simultaneously spread probability to the tails of the distribution. We consider a one-period model with exponential utilities for both principal and agent, solve the general problem for risk sharing, moral hazard and adverse selection up to a transcendental equation and discuss the numerical properties of the optimal contract. We fully solve the case of a risk-neutral principal for both moral hazard and adverse selection, and explore the possibility of a continuous time extension.