Wealth Effects in the Principal Agent Model

30 Pages Posted: 28 Jun 1998

See all articles by Henrik Thiele

Henrik Thiele

Ludwig Maximilian University of Munich (LMU) - Seminar for Theoretical Economics

Achim Wambach

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1998

Abstract

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

Thiele, Henrik and Wambach, Achim, Wealth Effects in the Principal Agent Model (February 1998). Available at SSRN: https://ssrn.com/abstract=102622 or http://dx.doi.org/10.2139/ssrn.102622

Henrik Thiele (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Seminar for Theoretical Economics ( email )

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Achim Wambach

ZEW – Leibniz Centre for European Economic Research ( email )

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D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
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Mannheim, 68131
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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