Contingent Fixed Contracts - An Alternative to the Classic Agency Theory

Abstract

For the classic agency model (Holmstrom, 1979), under different assumptions, we offer a completely different solution than the standard solution in the literature. Our optimal contract has a closed form, offers a contingent fixed payment, and is efficient. In contrast, the standard contract in the literature is implicitly determined by four equations except for one special case, is based on the unreliable first-order approach, and is inefficient.