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Optimal risk-sharing with effort and project choice

Cadenillas, Abel and Cvitanić, Jakša and Zapatero, Fernando (2007) Optimal risk-sharing with effort and project choice. Journal of Economic Theory, 133 (1). pp. 403-440. ISSN 0022-0531. doi:10.1016/j.jet.2005.12.007. https://resolver.caltech.edu/CaltechAUTHORS:20100909-143417799

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Abstract

We consider first-best risk-sharing problems in which “the agent” can control both the drift (effort choice) and the volatility of the underlying process (project selection). In a model of delegated portfolio management, it is optimal to compensate the manager with an option-type payoff, where the functional form of the option is obtained as a solution to an ordinary differential equation. In the general case, the optimal contract is a fixed point of a functional that connects the agent's and the principal's maximization problems. We apply martingale/duality methods familiar from optimal consumption-investment problems.


Item Type:Article
Related URLs:
URLURL TypeDescription
http://dx.doi.org/10.1016/j.jet.2005.12.007 DOIArticle
ORCID:
AuthorORCID
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:© 2006 Elsevier. Received 4 May 2004; revised 14 December 2005. Available online 13 February 2006. The research of A. Cadenillas was supported by the Social Sciences and Humanities Research Council of Canada grant 410 - 2003 - 1401. The research of J. Cvitaníc was supported in part by the National Science Foundation, under Grant NSF-DMS-00-99549 and DMS 04-03575. This paper is based on a previous paper titled \Dynamic Principal-Agent Problems with Perfect Information." We are very grateful to seminar and conference participants at the Bachelier Finance Society Third World Congress (Chicago), Caltech, Carnegie- Mellon, Columbia, the June 2004 Croatian Congress of Mathematics (Split, Croatia), Princeton, UC-San Diego, UT-Austin, the June 2005 Workshop on Stochastic Modeling in Financial Mathematics (Centre de recherches mathématiques, Montreal), and two anonymous referees, for many comments and suggestions. Existing errors are our sole responsibility.
Funders:
Funding AgencyGrant Number
Social Sciences and Humanities Research Council of Canada410-2003-1401
NSFDMS-00-99549
NSFDMS 04-03575
Subject Keywords:first-best risk-sharing; effort and project choice; Merton's problem; martingale methods
Issue or Number:1
Classification Code:JEL classification: C61, J33
DOI:10.1016/j.jet.2005.12.007
Record Number:CaltechAUTHORS:20100909-143417799
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20100909-143417799
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:19853
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:10 Sep 2010 02:59
Last Modified:08 Nov 2021 23:55

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