Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/334126 
Year of Publication: 
2024
Citation: 
[Journal:] Asian Journal of Economics and Banking (AJEB) [ISSN:] 2633-7991 [Volume:] 8 [Issue:] 3 [Year:] 2024 [Pages:] 310-334
Publisher: 
Emerald, Leeds
Abstract: 
Purpose: We aim to generalize the continuous-time principal-agent problem to incorporate time-inconsistent utility functions, such as those of mean-variance type, which are prevalent in risk management and finance. Design/methodology/approach: We use recent advancements of the Pontryagin maximum principle for forward-backward stochastic differential equations (FBSDEs) to develop a method for characterizing optimal contracts in such models. This approach addresses the challenges posed by the non-applicability of the classical Hamilton-Jacobi-Bellman equation due to time inconsistency. Findings: We provide a framework for deriving optimal contracts in the principal-agent problem under hidden action, specifically tailored for time-inconsistent utilities. This is illustrated through a fully solved example in the linear-quadratic setting, demonstrating the practical applicability of the method. Originality/value: The work contributes to the existing literature by presenting a novel mathematical approach to a class of continuous time principal-agent problems, particularly under hidden action with time-inconsistent utilities, a scenario not previously addressed. The results offer potential insights for both theoretical development and practical applications in finance and economics.
Subjects: 
Principal-agent problem
Stochastic maximum principle
Pontryagin's maximum principle
Mean-variance
Time inconsistent utility functions
JEL: 
B41
C00
C61
C70
C72
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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