ECON 704 Midterm: 704_prelim_Cole
Document Summary
Assume that there is a single agent who ends up contracting with a single principal. The agent has stochastic income yt 2 y for t = 1; 2; :::: these income draws are i. i. d. and occur with probability (cid:5)(y): the agent has standard expected-utility-risk-averse preferences. E0( 1xt=1 (cid:12)tu(ct)) ; where u0 > 0 and u00 < 0: the principal has deep pockets and only cares about the expected cost of o ering an insurance contract to the agent. The principal discounts his future costs at the same rate as the agent; i. e. (cid:12): Assume that there is limited enforcement on the agent(cid:146)s part in the following sense. In any period, after seeing his income, the agent can run away. To close the model, assume that in period 0 (before any income(cid:146)s have been realized) a number of principals compete to contract with the agent.
