The optimal contract maximizes the entrepreneur's expected compensation:
Subject to the entrepreneur's incentive constraint
and the investor's breakeven constraint:
My notes say that the optimal contract is but I have no idea how to set up the Lagrangian's to solve for this.
- entrepreneur's effort
- no effort
- return for borrower if project is success
- return for borrower if project fails
- benefit per unit of investment, when no effort
- investment
- cash holding
- return on investment if success
- return on investment if failure