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The Effects of Risk Aversion on Production Decisions in Decentralized Organizations

Author

Listed:
  • Anil Arya

    (Department of Accounting and MIS, College of Business, The Ohio State University, 1775 College Road, Columbus, Ohio 43210-1399)

  • John C. Fellingham

    (Department of Accounting and MIS, College of Business Administration, Pennsylvania State University, University Park, Pennsylvania 16802-1912)

  • Richard A. Young

    (Department of Accounting and MIS, College of Business, The Ohio State University, 1775 College Road, Columbus, Ohio 43210-1399)

Abstract

This paper presents a principal-agent model in which subsequent to contracting the risk averse agent becomes informed about the production process. Communication of the agent's information is always valuable. The optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric, leading to an efficiency loss. Comparative statics show that the loss in expected production increases as the agent becomes more risk averse.

Suggested Citation

  • Anil Arya & John C. Fellingham & Richard A. Young, 1993. "The Effects of Risk Aversion on Production Decisions in Decentralized Organizations," Management Science, INFORMS, vol. 39(7), pages 794-805, July.
    • Handle: RePEc:inm:ormnsc:v:39:y:1993:i:7:p:794-805
    DOI: 10.1287/mnsc.39.7.794
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    Citations

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    Cited by:

    1. Andrew Samuel & Seth D. Guikema, 2012. "Resource Allocation for Homeland Defense: Dealing with the Team Effect," Decision Analysis, INFORMS, vol. 9(3), pages 238-252, September.
    2. Madhav V. Rajan & Stefan Reichelstein, 2004. "ANNIVERSARY ARTICLE: A Perspective on ÜAsymmetric Information, Incentives and Intrafirm Resource AllocationÝ," Management Science, INFORMS, vol. 50(12), pages 1615-1623, December.
    3. Nicole Bastian Johnson & Thomas Pfeiffer & Georg Schneider, 2013. "Multistage Capital Budgeting for Shared Investments," Management Science, INFORMS, vol. 59(5), pages 1213-1228, May.
    4. Rick Antle & Peter Bogetoft & Andrew W. Stark, 1999. "Selection from Many Investments with Managerial Private Information," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 397-418, September.

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