Abstract
The principal-agent problems in continuous-time with general utilities are analyzed. We show that, when the agent's utility function is separable over income and action, the principal-agent problems can be converted to standard dynamic optimization ones over a space of controlled processes, which again can be further reduced to solving static optimization problems over the space of probability measures via the Martingale approach. The optimal contract is explicitly characterized and is shown to be a nonlinear function of some linear aggregates when the underlying cost function of probability measure is separable. Comparative statics analysis is performed and various applications are given in specific situations. In terms of model tractability, the analysis of the paper can be best understood as the nonlinear analogue of Holmstrom and Milgrom (1987).
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