Compensation, Incentives and Risk-Taking in Principal-Agent Models

Two parties with distinct goals interact in a financial market: The risk-constrained principal provides some capital and employs the agent to invest and subsequently control the portfolio in his name. A performance-related wage schedule is agreed to compensate the agent for her actions. We investigate how risk can be transferred in this setup and what incentives are set by various contracts. In particular the high-water mark portfolio problem in discrete-time is solved.