publication . Preprint . Report . 2004

A Continuous-Time Agency Model of Optimal Contracting and Capital Structure

Peter DeMarzo; Yuliy Sannikov;
Open Access
  • Published: 01 Jul 2004
We consider a principal-agent model in which the agent needs to raise capital from the principal to finance a project. Our model is based on DeMarzo and Fishman (2003), except that the agent's cash flows are given by a Brownian motion with drift in continuous time. The difficulty in writing an appropriate financial contract in this setting is that the agent can conceal and divert cash flows for his own consumption rather than pay back the principal. Alternatively, the agent may reduce the mean of cash flows by not putting in effort. To give the agent incentives to provide effort and repay the principal, a long-term contract specifies the agent's wage and can for...
free text keywords: jel:D82, jel:G32

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