Optimal Incentive Contract in Continuous Time with Different Behavior Relationships between Agents

Abstract

Based on the principal-agent model, the continuous time optimal contract with asymmetric information is studied in the case of competition, cooperation, and neutrality between two agents, and the optimal behavior selection and incentive mechanism of agents are analyzed. The results show that the behavioral relationship between agents under moral hazard can affect the agents’ effort level, remuneration, and overall profit. Agents in a cooperative relationship are prone to free-riding opportunistic behavior, so the incentive utility brought by agents in the competitive relationship is greater than that brought by the cooperative relationship. Finally, it is proposed that the principal enhance the relationship between agents through the reward and punishment system to achieve the maximum benefit.

Keywords: Optimal incentive contracts, Moral hazard, Continuous-time, Behavior relationship