Aggregate and Idiosyncratic Risk and the Behavior of Individual Preferences under Moral Hazard
AbstractWe consider the effect of alternative individual preference towards effort conditional on aggregate risk in a principal-agent relationship under moral hazard. We find that agents can explore a negative correlation between individual preference towards effort and aggregate risk to further diversify idiosyncratic risk and increase expected utility under moral hazard. The variation of individual preference towards effort may mitigate the impact of moral hazard on the risk premium, but we find this to be quantitatively small.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0410.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Medford, MA 02155, USA
Phone: (617) 627-3560
Fax: (617) 627-3917
Web page: http://ase.tufts.edu/econ
moral hazard; disutility of effort; incomplete contract; meanvariance tradeoff;
Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E0 - Macroeconomics and Monetary Economics - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-07 (All new papers)
- NEP-CFN-2004-03-07 (Corporate Finance)
- NEP-MIC-2004-03-07 (Microeconomics)
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.:
- Pierpaolo Battigalli & Giovanni Maggi, 2002. "Rigidity, Discretion, and the Costs of Writing Contracts," American Economic Review, American Economic Association, vol. 92(4), pages 798-817, September.
- Deaton, Angus, 1991.
"Saving and Liquidity Constraints,"
Econometric Society, vol. 59(5), pages 1221-48, September.
- Pishke, J.S., 1992.
"Individual Income, Incomplete Information and Aggregate Consumption,"
9238, Tilburg - Center for Economic Research.
- Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-40, July.
- Pischke, J.S., 1993. "Individual Income, Incomplete Information, and Aggregate Consumption," Working papers 93-16, Massachusetts Institute of Technology (MIT), Department of Economics.
- Pischke, Jörn-Steffen, 1991. "Individual income, incomplete information, and aggregate consumption," ZEW Discussion Papers 91-07, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Bengt Holmstrom, 1979.
"Moral Hazard and Observability,"
Bell Journal of Economics,
The RAND Corporation, vol. 10(1), pages 74-91, Spring.
- Phelan, Christopher, 1994. "Incentives and Aggregate Shocks," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 681-700, October.
- Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
- Oliver Hart & John Moore, 1998.
"Foundations of Incomplete Contracts,"
Harvard Institute of Economic Research Working Papers
1846, Harvard - Institute of Economic Research.
- Bianconi, Marcelo, 2003.
"Private information, growth, and asset prices with stochastic disturbances,"
International Review of Economics & Finance,
Elsevier, vol. 12(1), pages 1-24.
- Marcelo Bianconi, 2003. "Private Information, Growth and Asset Prices with Stochastic Disturbances," Discussion Papers Series, Department of Economics, Tufts University 0301, Department of Economics, Tufts University.
- Bianconi, Marcelo, 2001.
"Heterogeneity, Efficiency and Asset Allocation with Endogenous Labor Supply: The Static Case,"
University of Manchester, vol. 69(3), pages 253-68, June.
- Marcelo Bianconi, 1999. "Heterogeneity, Efficiency, and Asset Allocation with Endogenous Labor Supply: The Static Case," Computing in Economics and Finance 1999 354, Society for Computational Economics.
- Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
- Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
- Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Kalogeropoulos).
If references are entirely missing, you can add them using this form.