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Risk Aversion, Moral Hazard, and the Principal's Loss

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Author Info
Hector Chade () (W. P. Carey School of Business Department of Economics)
Virginia Vera de Serio (Facultad de Ciencias Economicas, Universidad Nacional)
Abstract

In their seminal paper on the principal-agent model with moral hazard, Grossman and Hart (1983) show that the loss to the principal from being unable to observe the agent’s action is increasing in the agent’s degree of absolute risk aversion. Their proof is restricted to the case where the number of observable outcomes is equal to two, and uses an argument which is specific to that case. In this note, we provide a different proof that generalizes their result to any (finite) number of outcomes.

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Paper provided by Department of Economics, W. P. Carey School of Business, Arizona State University in its series Working Papers with number 2133303.

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Handle: RePEc:asu:wpaper:2133303

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D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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  1. Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 258-76, April. [Downloadable!] (restricted)
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  2. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  3. Paul Milgrom, . "The Envelope Theorems," Working Papers 99016, Stanford University, Department of Economics. [Downloadable!]
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This page was last updated on 2009-12-15.

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