*This page is referenced in [[BPP Field Exam Papers]]
==Reference(s)==
Holmstrom B., (1999) "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, 66(1): 169-182 [http://www.edegan.com/pdfs/Holmstrom%20(1999)%20-%20Managerial%20Incentive%20Problems.pdf pdf]
So must conclude that the variance tends to a steady state and not to zero. This in turn leads to steady state effort, which we can solve for by equating the marginal benefit to the marginal cost of a change:
Which in turn leads to Holmstrom's proposition 1 that the stationary effort is <math>a^{*}\leq a^{FB}\,</math> and only equal to first best if <math>\beta =1,\,\frac{1}{h_{\varepsilon }}>0\,</math>, and <math>$\frac{1}{h_{\delta }}>0\,</math>