The Holmström-Milgrom Model: A Simplified and Illustrated Version
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Original versionLundesgaard, J. (2001). The Holmström-Milgrom Model: A Simplified and Illustrated Version. Scandinavian Journal of Management 17(3), 287-303
In principal-agent theory, Holmström (1979, Bell Journal of Economics, 10, 74–91) offers the canonical model including a hidden one-shot action taken by an agent contracted to provide effort. Holmström's classical investigation led to an important body of applied literature. In investigating a specification in which effort is a sequence of actions, Holmström and Milgrom (1987, Econometrica, 55, 303–328) were able to provide a proof of the optimality of linear reward schemes (in the one-shot model, reward schemes are never linear). The sequence-of-actions model has a corresponding (static), very tractable companion. In this paper a simplified and illustrated version of this model is presented.
Fagfellevurdert artikkel tidligere publisert i Scandinavian Journal of Management, 2001, 17(3). http://www.journals.elsevier.com/scandinavian-journal-of-management/