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Optimal Incentives in a Principal-Agent Model with Endogenous Technology

Author

Listed:
  • Marco A. Marini

    () (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza")

  • Paolo Polidori

    () (University of Urbino)

  • Desiree Teobaldelli

    () (University of Urbino)

  • Davide Ticchi

    () (IMT Institute for Advanced Studies Lucca)

Abstract

One 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 efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom's (1987) framework, we obtain that lower agent's risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion-incentive relationship can be positive when this function is rigid

Suggested Citation

  • Marco A. Marini & Paolo Polidori & Desiree Teobaldelli & Davide Ticchi, 2014. "Optimal Incentives in a Principal-Agent Model with Endogenous Technology," DIAG Technical Reports 2014-01, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  • Handle: RePEc:aeg:report:2014-01
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    principal-agent; incentives; risk aversion; endogenous technology;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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