Collaborative Research: Theory, Numerics and Applications of Optimal Contracting in Stochastic Differential Equations Models

California Institute Of Technology, Pasadena CA

Investigators

Abstract

Theory, Numerics and Applications of Optimal Contracting in Stochastic Differential Equation Models Abstract of Proposed Research Jaksa Cvitanic and Jianfeng Zhang This research is to study the theory of optimal contracting in continuous time models and their interpretation for existing ways of compensating executives and managers in practice. It is also planned to conduct some laboratory experiments to test the predictions of these theories and develop efficient numerical methods for simulations of the models. The hope is that this work will help understand the efficiency of different types of compensation schemes for parties in a contract and for society as a whole. This project will study models of optimal contracting using stochastic optimization with decisions made dynamically in time using forward backward stochastic differential equations. The analysis will include high-dimensional models which are needed when there are more than two contracting parties involved. It is proposed to develop efficient numerical schemes for computing solutions of these problems.