Risk Aversion and Incentives
AbstractWe consider decision-makers facing a risky wealth prospect. The probability distribution depends on pecuniary effort, e.g., the amount invested in a venture or prevention expenditures to protect against accidental losses. We provide necessary local conditions and sufficient global conditions for greater risk aversion to induce more (or less) investment or to have no effect. We apply our results to incentives in the principal-agent framework when differently risk averse agents face the same monetary incentives.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1405.
Date of creation: 2014
Date of revision:
Expected utility; risk aversion; comparative statics; mean utility preserving increase in risk; location independent risk;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-MIC-2014-02-02 (Microeconomics)
- NEP-UPT-2014-02-02 (Utility Models & Prospect Theory)
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