Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/94141 
Year of Publication: 
2008
Series/Report no.: 
SFB/TR 15 Discussion Paper No. 232
Publisher: 
Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY), München
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 empirical 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 increasing the weight on the signal and, hence, choosing higher-powered incentives.
Subjects: 
moral hazard
limited liability
risk-incentive relationship
JEL: 
D82
D86
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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