Optimal Incentives in a Principal-Agent Model with Endogenous Technology
AbstractOne of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher e¢ ciency are also riskier. Using a modi ed version of the Holmstrom and Milgroms (1987) framework, we obtain that lower agents risk aversion unambiguously leads to higher incentives when the technology function linking e¢ ciency and riskiness is elastic, while the risk aversion-incentive relation- ship can be positive when this function is rigid.
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 University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini in its series Working Papers with number 1304.
Length: 10 pages
Date of creation: 2013
Date of revision: 2013
Principal-agent; Incentives; Risk aversion; Endogenous technolog;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-CTA-2013-10-25 (Contract Theory & Applications)
- NEP-HRM-2013-10-25 (Human Capital & Human Resource Management)
- NEP-MIC-2013-10-25 (Microeconomics)
- NEP-ORE-2013-10-25 (Operations Research)
- NEP-PPM-2013-10-25 (Project, Program & Portfolio Management)
- NEP-UPT-2013-10-25 (Utility Models & Prospect Theory)
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.:
- Rajesh Aggarwal & Andrew A. Samwick, 1998.
"The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation,"
NBER Working Papers
6634, National Bureau of Economic Research, Inc.
- Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "The Other Side of the Trade-off: The Impact of Risk on Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 65-105, February.
- Patrick Legros & Andrew F. Newman, 2002.
"Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities,"
Boston University - Department of Economics - The Institute for Economic Development Working Papers Series
dp-149, Boston University - Department of Economics, revised Nov 2004.
- Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, 07.
- Patrick Legros & Andrew F. Newman, 2003. "Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities," Economics Working Papers 0030, Institute for Advanced Study, School of Social Science.
- Allen, Douglas W & Lueck, Dean, 1995. "Risk Preferences and the Economics of Contracts," American Economic Review, American Economic Association, vol. 85(2), pages 447-51, May.
- Li, Fei & Ueda, Masako, 2009. "Why do reputable agents work for safer firms?," Finance Research Letters, Elsevier, vol. 6(1), pages 2-12, March.
- Grund, Christian & Sliwka, Dirk, 2010. "Evidence on performance pay and risk aversion," Economics Letters, Elsevier, vol. 106(1), pages 8-11, January.
- Bengt Holmstrom & Paul R. Milgrom, 1985.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Cowles Foundation Discussion Papers
742, Cowles Foundation for Research in Economics, Yale University.
- Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
- C. Bram Cadsby & Fei Song & Francis Tapon, 2009. "The Impact of Risk Aversion and Stress on the Incentive Effect of Performance Pay," Working Papers 0912, University of Guelph, Department of Economics and Finance.
- 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.
- Konstantinos Serfes, 2008. "Endogenous matching in a market with heterogeneous principals and agents," International Journal of Game Theory, Springer, vol. 36(3), pages 587-619, March.
- Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September.
- 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.
- 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.
- John Core, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, 06.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carmela Nicoletti).
If references are entirely missing, you can add them using this form.