Aggregate and Idiosyncratic Risk and the Behavior of Individual Preferences under Moral Hazard
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.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (617) 627-3560
Fax: (617) 627-3917
Web page: http://ase.tufts.edu/economics
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.:
- Bengt Holmstrom, 1997.
"Moral Hazard and Observability,"
Levine's Working Paper Archive
1205, David K. Levine.
- Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
- 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, 2003. "Private information, growth, and asset prices with stochastic disturbances," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 1-24.
- 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.
- 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.
- Pischke, J.S., 1993.
"Individual Income, Incomplete Information, and Aggregate Consumption,"
93-16, Massachusetts Institute of Technology (MIT), Department of Economics.
- Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-40, July.
- Pishke, J.S., 1992. "Individual Income, Incomplete Information and Aggregate Consumption," Papers 9238, Tilburg - Center for Economic Research.
- 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.
- Oliver Hart & John Moore, 1998.
"Foundations of Incomplete Contracts,"
Harvard Institute of Economic Research Working Papers
1846, Harvard - Institute of Economic Research.
- Oliver Hart & John Moore, 1998. "Foundations of incomplete contracts," LSE Research Online Documents on Economics 19354, London School of Economics and Political Science, LSE Library.
- Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
- 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.
- Angus Deaton, 1989.
"Saving and Liquidity Constraints,"
NBER Working Papers
3196, National Bureau of Economic Research, Inc.
- Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:tuf:tuftec:0410. See general information about how to correct material in RePEc.
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.