Wealth Effects in the Principal Agent Model
30 Pages Posted: 28 Jun 1998
Date Written: February 1998
This paper addresses the question of how the principal's surplus and agency costs depend on the agent's wealth. Using the first-order approach, we identify properties of the agent's utility function which are sufficient conditions to guarantee that richer agents induce a lower expected surplus for the principal.
In the case of a finite number of effort levels, additional assumptions are required to ensure that agency costs increase with the agent's wealth, namely that either the utility function is additively separable in income and effort or that the incentive compatibility constraints only bind downwards in the optimum.
JEL Classification: D82, G3, J33
Suggested Citation: Suggested Citation