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Optimal contract with habit formation

The paper examines a continuous-time principal-agent model in which agent’s preference exhibits habit formation over consumption. As agent’s concern over the standard of living strengthens, his continuation utility is less sensitive to current wealth but more sensitive to the standard of living, leading to lower demand for risk-sharing compensation. The optimal contract has lower pay-for-performance but incentivizes agent’s higher effort. In the Leland (1994) capital structure model, agent’s habit formation preference combined with the optimal contract lowers firm’s leverage and mitigates the debt-overhang problem. / 2025-05-28T00:00:00Z

Identiferoai:union.ndltd.org:bu.edu/oai:open.bu.edu:2144/48891
Date28 May 2024
CreatorsWang, Jingyan
ContributorsXing, Hao
Source SetsBoston University
Languageen_US
Detected LanguageEnglish
TypeThesis/Dissertation
RightsAttribution 4.0 International, http://creativecommons.org/licenses/by/4.0/

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