Dynamic Programming Approach to Principal-Agent Problems by Dylan Possamaï

Event Date: 

Monday, February 22, 2016 - 5:00pm to 6:30pm

Event Date Details: 

Refreshments served at 3:15 p.m. 

Event Location: 

  • South Hall 5607F

Dylan Possamaï — Université Paris-Dauphine 

Title: Dynamic Programming Approach to Principal-Agent Problems

Abstract: We consider a general formulation of the Principal-Agent problem from Contract Theory, on a finite horizon. We focus in particular on the case where the agent can control the volatility of the output process. We show how to reduce the problem to a stochastic control problem which may be analyzed by the standard tools of control theory. In particular, Agent's value function appears naturally as a controlled state variable for the Principal's problem. Our argument relies on the Backward Stochastic Differential Equations approach to non-Markovian stochastic control, and more specifically, on the most recent extensions to the second order case. This is a joint work with Jaksa Cvitanic and Nizar Touzi.