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Optimal Contracting With Dynamic Multitasking Open Access


Other title
Principal-agent Problem
Effort Exertion
Accident Prevention
Optimal Contracting
Type of item
Degree grantor
University of Alberta
Author or creator
Chen, Wenjie
Supervisor and department
Frei, Christoph (Mathematical and Statistical Sciences)
Examining committee member and department
Marcoul, Philippe (Resource Economics and Environmental Sociology)
Frei, Christoph (Mathematical and Statistical Sciences)
Aguerrevere, Felipe (Finance and Statistical Analysis)
Melnikov, Alexander (Mathematical and Statistical Sciences)
Department of Mathematical and Statistical Sciences
Mathematical Finance
Date accepted
Graduation date
Master of Science
Degree level
We formulate a continuous-time principal-agent model in which the agent performs two tasks: accident prevention and effort exertion. The principal can design a contract for the agent consisting of three components: a lump-sum payment, penalties when accidents occur, and continuous payments depending on the daily production outcome. A patient principal induces the agent to do more prevention and less effort as time progresses so that the principal earns the benefit from extra accident reduction net extra lump-sum payment. The principal punishes a risk-averse agent on the same level regardless of the actual accident size. The principal gives incentives for more effort and less prevention if the agent is highly risk averse to sudden payment decreases because this allows the principal to avoid a massive lump-sum payment needed to compensate the agent. When a risk-neutral agent is protected by an absolute threshold on the penalty per accident, as a form of partially limited liability, he/she is punished more for small accidents than he/she is without the protection. For a risk-neutral agent, a suitably chosen threshold in percentage of the accident costs has the same effect on the optimal task levels as an absolute threshold. However, such a link does not exist when the agent is risk averse.
Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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