Consider a principal-agent relationship where agent’s effort, e, is not observable by the Principal, and hence it is not contractible. Agent’s output, z, is however contractible. Agent’s output is linked to agent’s effort by the following relationship: z = e + x,
Consider a principal-agent relationship where agent’s effort, e, is not observable by the Principal, and hence it is not contractible. Agent’s output, z, is however contractible. Agent’s output is linked to agent’s effort by the following relationship: z = e + x, where x is a stochastic noise with E(x) = 0 and Var(x) = […]