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Limited Liability and the Trade-off between Risk and Incentives

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Author Info
Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn. Tel: +49-228-739211, Fax: +49-228-739210, Germany, e-mail: m.kraekel@uni-bonn.de)

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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.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 201.

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Date of creation: Apr 2007
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Handle: RePEc:trf:wpaper:201

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Related research
Keywords: limited liability; piece rates; risk aversion; risk-incentives trade-off;

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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September. [Downloadable!] (restricted)
  2. Hadar, Josef & Russell, William R., 1971. "Stochastic dominance and diversification," Journal of Economic Theory, Elsevier, vol. 3(3), pages 288-305, September. [Downloadable!] (restricted)
  3. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September. [Downloadable!]
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This page was last updated on 2009-12-1.

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