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Risk Aversion and the Pareto Frontier of a Dynamic Principal-Agent Model: An Evolutionary Approximation

Author

Listed:
  • Sonia Di Giannatale

    (Division of Economics, CIDE)

  • Itza T. Q. Curiel
  • Juan A. Herrera
  • Katya Rodríguez

Abstract

In this paper we formulate an infinitely repeated Principal-Agent relationship as a Multi-Objective Optimization problem. We numerically approximate the solution of this model using a Multi-Objective Optimization Evolutionary Algorithm, named RankMOEA, for different values of the Agent's coefficient of relative risk aversion. Our numerical results indicate that as the Agent becomes more risk averse, the Pareto Frontier becomes less concave, the Principal-Agent relationship generates more value for the Agent, and the Principal appears to assume more of the risk sharing regardless of the contract we analyze along the Pareto Frontier.

Suggested Citation

  • Sonia Di Giannatale & Itza T. Q. Curiel & Juan A. Herrera & Katya Rodríguez, 2011. "Risk Aversion and the Pareto Frontier of a Dynamic Principal-Agent Model: An Evolutionary Approximation," Working Papers DTE 521, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte521
    as

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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE521.pdf
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    References listed on IDEAS

    as
    1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    2. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    3. Sonia B. Di Giannatale & Itza Curiel & Juan Herrera & Katya Rodriguez, 2010. "Aproximación con algoritmos evolutivos de la frontera de Pareto de un modelo dinámico de agente-principal con acciones discretas," Working Papers DTE 476, CIDE, División de Economía.
    4. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
    2. Sonia Di Giannatale & Itza Curiel & Juan Herrera & Katya Rodríguez, 2012. "Productivity Shocks, Discount Rate and Incentives," Working Papers DTE 531, CIDE, División de Economía.

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    More about this item

    Keywords

    Risk Aversion; Pareto Frontier; Dynamic Principal-Agent Model;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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