Risk aversion, moral hazard, and the principal's loss

Hector Chade; Virginia N Vera De Serio

doi:10.1007/s001990100222

Risk aversion, moral hazard, and the principal's loss

Hector Chade, Virginia N Vera De Serio

Economics

Research output: Contribution to journal › Article › peer-review

6 Scopus citations

Abstract

In their seminal paper on the principal-agent model with moral hazard, Grossman and Hart (1983) show that if the agent's utility function is U(I, a) = -e^-k(I-a), then the loss to the principal from being unable to observe the agent's action is increasing in the agent's degree of absolute risk aversion. Their proof is restricted to the case where the number of observable outcomes is equal to two, and it uses an argument that is specific to that case. In this note, we provide an alternative proof that generalizes their result to any (finite) number of outcomes.

Original language	English (US)
Pages (from-to)	637-644
Number of pages	8
Journal	Economic Theory
Volume	20
Issue number	3
DOIs	https://doi.org/10.1007/s001990100222
State	Published - Oct 2002

Keywords

Moral hazard
Principal-agent
Risk aversion

ASJC Scopus subject areas

Economics and Econometrics

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10.1007/s001990100222

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Risk aversion, moral hazard, and the principal's loss

Abstract

Keywords

ASJC Scopus subject areas

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