Optimal Incentives in a Principal-Agent Model with Endogenous Technology
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 e¢ ciency 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 e¢ ciency and riskiness is elastic, while the risk aversion-incentive relation- ship can be positive when this function is rigid.
|Date of creation:||2013|
|Date of revision:||2013|
|Contact details of provider:|| Web page: http://www.econ.uniurb.it/|
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