Optimal risk-sharing with effort and project choice

@article{Cadenillas2007OptimalRW,
  title={Optimal risk-sharing with effort and project choice},
  author={Abel Cadenillas and Jaksa Cvitanic and Fernando Zapatero},
  journal={J. Economic Theory},
  year={2007},
  volume={133},
  pages={403-440}
}
We consider first-best risk-sharing problems in which “the agent” can control both the drift (effort choice) and the volatility of the underlying process (project selection). In a model of delegated portfolio management, it is optimal to compensate the manager with an option-type payoff, where the functional form of the option is obtained as a solution to an ordinary differential equation. In the general case, the optimal contract is a fixed point of a functional that connects the agent’s and… CONTINUE READING
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