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Limited liability and the risk–incentive relationship

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  • Jörg Budde

    ()

  • Matthias Kräkel

    ()

Abstract

Several empirical findings have challenged the traditional view on the trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained. Increasing risk leads to a less informative performance signal. Under limited liability, the principal may optimally react by increasing the weight on the signal and, hence, choosing higher-powered incentives.

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Bibliographic Info

Article provided by Springer in its journal Journal of Economics.

Volume (Year): 102 (2011)
Issue (Month): 2 (March)
Pages: 97-110

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Handle: RePEc:kap:jeczfn:v:102:y:2011:i:2:p:97-110

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Web page: http://www.springerlink.com/link.asp?id=108909

Related research

Keywords: Moral hazard; Limited liability; Risk–incentive relationship; D82; D86;

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