Abstract

Kamien & Schwartz’ famous maintenance model is taken as a basis to analyze an agency problem in continuous time. The owner of the system to be maintained delegates the maintenance job to an agent. The discount rate of the agent is assumed to be higher than that of the owner. The so-called first-best problem assumes the agent be able to commit himself to an agreed upon effort level for the whole contract period. The analysis shows that both parties can capitalize on the different discount rates. The optimal effort level turns out to be increasing during every given finite contract period. Both parties tend to choose the contract period as long as possible.

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