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Limited Liability and the Trade-off between Risk and Incentives

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  • Kräkel, Matthias

Abstract

Several 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.

Suggested Citation

  • Kräkel, Matthias, 2007. "Limited Liability and the Trade-off between Risk and Incentives," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 201, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:201
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    References listed on IDEAS

    as
    1. Hadar, Josef & Russell, William R., 1971. "Stochastic dominance and diversification," Journal of Economic Theory, Elsevier, vol. 3(3), pages 288-305, September.
    2. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    3. Donald J. Wright, 2004. "The Risk and Incentives Trade-off in the Presence of Heterogeneous Managers," Journal of Economics, Springer, vol. 83(3), pages 209-223, December.
    4. Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September.
    5. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    limited liability; piece rates; risk aversion; risk-incentives trade-off;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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