Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/27167 
Year of Publication: 
2008
Series/Report no.: 
Bonn Econ Discussion Papers No. 6/2008
Publisher: 
University of Bonn, Bonn Graduate School of Economics (BGSE), Bonn
Abstract: 
Several empirical findings have challenged the traditional view on the trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empiri- cal puzzle on the positive relationship between risk and incentives can be explained. Increasing risk leads to a less informative performance signal. Under limited liability; the principal may optimally react by in- creasing the weight on the signal and; hence; choosing higher-powered incentives.
Subjects: 
moral hazard
limited liability
risk-incentive relationship
JEL: 
D82
D86
Document Type: 
Working Paper

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