Wealth Effects in the Principal Agent Model

Posted: 11 Oct 1999

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)

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Abstract

This paper addresses the question of how the principal's surplus and agency costs depend on the agent's wealth. Our main results are: If the agent has an additively separable utility function in income and effort and his degree of absolute prudence is smaller than three times the agent's degree of absolute risk aversion, then the principal's expected pay-off is smaller the richer the agent. For general utility functions, this result also holds if the first order approach is applicable and one further technical assumption is satisfied. If, however, the participation constraint does not bind, then richer agents are cheaper.

JEL Classification: D82, G3, J33

Suggested Citation

Thiele, Henrik and Wambach, Achim, Wealth Effects in the Principal Agent Model. Journal of Economic Theory, Available at SSRN: https://ssrn.com/abstract=177948

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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University of Mannheim ( email )

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