A General Model for Continuous Time Principal-Agent Problem Under Hidden Action

Battle Count: 72

The paper is primarily about contract theory and mechanism design rather than trading strategies. However, the stochastic calculus tools (BSDEs, FBSDEs, Girsanov theorem, HJB equations) are shared with quantitative finance. The pay-to-performance sensitivity concept has indirect relevance to performance-based fund management contracts. The diffusion-driven payment process connects to risk-sharing in financial contracts.

The paper involves highly advanced stochastic analysis: controlled diffusions, Girsanov theorem, BSDEs, coupled FBSDEs, HJB equations with unbounded controls, viscosity solutions, face-lifting issues, and concavity arguments. Implementing the general framework requires deep expertise in stochastic calculus and PDE theory. Even the explicit example requires careful handling of quadratic BSDEs and BMO martingales.

The paper is purely theoretical with complete mathematical proofs. All assumptions, propositions, theorems, and proofs are self-contained. However, the strong technical conditions (Assumptions 2.1, 3.1, 3.3, 4.1, 5.1, 5.2) make it difficult to apply to specific real-world scenarios without significant adaptation. The explicit example in Section 6 is fully reproducible.