Jianfeng Zhang

"Continuous-Time Principal-Agent Problems with Moral Hazard and/or Adverse Selection"

Abstract: We study the continuous time principal-agent problems with moral hazard and/or adverse selection. We will discuss the first-best, second-best, and third-best contracts for problems with general utilities. We take the first order approach, and our main tool is the stochastic maximum principle. The optimal contracts are characterized as solutions to some forward-backward stochastic differential equations. More importantly in economics, in the case with quadratic cost function, we transform the problem to a ``deterministic" optimization problem and then solve the problem semi-explicit. Some examples will be discussed. The talk is based on joint works with Jaksa Cvitanic and Xuhu Wan.