Holmstrom-Milgrom Model of Principal-Agent Based on Cobb-Douglas Function

Based on the generalized model of principal-agent theory, the Holmstrom-Milgrom Model is pre-digested, which is adopted mostly in literatures. However, the model assumes that the production function is linear, and the model doesn´t consider the ability level of agent, except for the effort level. This paper incorporates the ability level of the agent into the Holmstrom-Milgrom Model, constructing and analyzing a new model by mathematical approach based on the Cobb-Dauglas production function. The results suggest the degree of effort level of the agent has increased, and the cost of risk has decreased in the new model. Simultaneously, the expected income of the principal has improved. The new model has more interpreting meaning as a Pareto-improvement.