Risk Sharing and the Theory of the Firm
AbstractWhen effort cannot be costlessly monitored, Pareto optimal employee compensation schemes require that owners and managers deviate from perfect risk sharing to improve the work incentives facing the manager. This article investigates the implications of this misallocation of risk for the behavior of firms in which managers make decisions for owners. The presented model predicts that, from the owner's perspective, managers will exhibit excessive risk aversion and underinvest in risky projects.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal Bell Journal of Economics.
Volume (Year): 13 (1982)
Issue (Month): 2 (Autumn)
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Web page: http://www.rje.org
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- Polinsky, A Mitchell, 1987.
"Fixed Price versus Spot Price Contracts: A Study in Risk Allocation,"
Journal of Law, Economics and Organization,
Oxford University Press, vol. 3(1), pages 27-46, Spring.
- A. Mitchell Polinsky, 1987. "Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation," NBER Working Papers 1817, National Bureau of Economic Research, Inc.
- Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
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