Year: 2025
Type: preprint
Abstract: We study a continuous time contracting model in which a principal hires a risk averse agent to manage a project over a finite horizon and provides sequential payments whose timing is endogenously determined. The resulting nonzero-sum interaction between the principal and the agent is reformulated as a mixed control and stopping problem. Using numerical simulations, we investigate how factors such as the relative impatience of the parties and the number of bonus payments influence the principal's value and the structure of the optimal bonus payment scheme. A notable finding is that, in some contractual environments, the principal optimally offers a sign-on bonus to front-load incentives.
Source: arXiv (Cornell University)
Authors: Alvarez, Guillermo Alonso, Ekren, Ibrahim, Huang, Liwei
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7108211343
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