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Aggregate and Idiosyncratic Risk and the Behavior of Individual Preferences under Moral Hazard

  • Marcelo Bianconi

We 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.

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File URL: http://ase.tufts.edu/econ/papers/200410.pdf
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Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0410.

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Date of creation: 2004
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Handle: RePEc:tuf:tuftec:0410
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  1. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  2. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. 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.
  4. Bianconi, Marcelo, 2001. "Heterogeneity, Efficiency and Asset Allocation with Endogenous Labor Supply: The Static Case," Manchester School, University of Manchester, vol. 69(3), pages 253-68, June.
  5. 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.
  6. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Phelan, Christopher, 1994. "Incentives and Aggregate Shocks," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 681-700, October.
  8. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  9. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 115-38, January.
  10. 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.
  11. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  12. 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.
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