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Limited Liability and the Trade-off between Risk and Incentives

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  • Matthias Kräkel

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Abstract

everal empirical findings have challenged the traditional 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.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse3_2007.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse3_2007.

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Length: 9
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:bon:bonedp:bgse3_2007

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: limited liability; piece rates; risk aversion;

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  1. Wright, Donald J., 2002. "The Risk and Incentives Trade-off in the Presence of Heterogeneous Man agers," Working Papers 2, University of Sydney, School of Economics.
  2. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  3. Hadar, Josef & Russell, William R., 1971. "Stochastic dominance and diversification," Journal of Economic Theory, Elsevier, vol. 3(3), pages 288-305, September.
  4. Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September.
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