Aggregation and Convexity in the Provision of Dynamic Incentives

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• Thomas Hemmer (Rice Business School)
• Thursday 19 June 2025, 13:00-14:00
• W2.01, CJBS.

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In this paper I identify an alternative preference structure that preserves most of the cherished simplicity of the formulation of the Principal-Agent problem pioneered by Holmstr¨om and Milgrom (1987). The main advantage of my approach is in relation to the structure of the optimal contract: it adds a convex component to their optimal linear contract. This provides new opportunities to revisit empirical predictions and studies based o↵ of their linear formulation and to demonstrate how the empirical irregularities may be at least partially explained by this one additional component identified here.

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