Xing, HaoWang, Jingyan2024-05-292024https://hdl.handle.net/2144/48891The paper examines a continuous-time principal-agent model in which agent’s preference exhibits habit formation over consumption. As agent’s concern over the standard of living strengthens, his continuation utility is less sensitive to current wealth but more sensitive to the standard of living, leading to lower demand for risk-sharing compensation. The optimal contract has lower pay-for-performance but incentivizes agent’s higher effort. In the Leland (1994) capital structure model, agent’s habit formation preference combined with the optimal contract lowers firm’s leverage and mitigates the debt-overhang problem.en-USAttribution 4.0 Internationalhttp://creativecommons.org/licenses/by/4.0/FinanceCapital structureHabit formationPrincipal-agentThesis/Dissertation2024-05-280009-0005-6480-7828