Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/59661
Authors: 
Szydlowski, Martin
Year of Publication: 
2012
Series/Report no.: 
Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1543
Abstract: 
I study a dynamic principal agent model in which the effort cost of the agent is unknown to the principal. The principal is ambiguity averse, and designs a contract which is robust to the worst case effort cost process. Ambiguity divides the contract into two regions. After sufficiently high performance, the agent reaches the over-compensation region, where he receives excessive benefits compared to the contract without ambiguity, while after low performance, he enters the under-compensation region. Ambiguity also causes a disconnect between the current effort cost and the strength of incentives. That is, even when the agent is under-compensated, his incentives are as strong as in the over-compensation region, since the principal fears the agent might shirk otherwise. Under ambiguity, the agent's true effort cost does not need to equal the worst-case. analyze the agent's incentives for this case, and show that the possibility of firing is detrimental to the agent's incentives. I study several extensions concerning the timing structure and the nature of the principal's ambiguity aversion.
Subjects: 
dynamic contract
principal-agent model
ambiguity aversion
continuous time
JEL: 
D82
D86
M52
Document Type: 
Working Paper

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