What Can We Learn from Simulating a Standard Agency Model?

For typical parameterizations of the standard Holmstrom [Bell Journal of Economics 10 (1979) 74] agency model, this paper demonstrates that the set of first-order conditions characterizing the optimal contract can be reduced to a single equation. A problem of investment financing under moral hazard is used to illustrate the reduced-form equation's usefulness in quantitative applications. When the agent has CARA preferences over consumption, it is shown that any exogenous limit on the penalties for low output is always binding