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Holmstrom (1999) - Managerial Incentive Problems (view source)
Revision as of 21:18, 6 April 2010
, 21:18, 6 April 2010→Set-up
The market will set wages:
<math>w_{t}(y^{t-1})=E\mathbb{B}[y_{t}|y^{t-1}]=E\mathbb{B}[\eta |y^{t-1}]+a_{t}(y^{t-1})\,</math>
The manager will best respond by choice an effort sequence:
<math>\underset{\{a_{t}(y^{t-1})\}_{t=1}^{\infty }}{\max }\;\sum_{t=1}^{\infty}\beta ^{t-1}[Ew_\mathbb{B}w_{t}(y^{t-1})-Eg\mathbb{B}g(a_{t}(y^{t-1}))]\,</math>
===Two Period Model===
Wages are paid in advance so in the second period the agent exerts no effort. In equilbrium <math>a_{1}^{*}\,</math> is correctly anticipated.
