Limited Liability and the Risk-Incentive Relationship

Year of publication:	2008-03
Authors:	Budde, Jörg ; Kräkel, Matthias
Institutions:	University of Bonn, Germany
Subject:	moral hazard \| limited liability \| risk-incentive relationship 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

Extent:	application/pdf
Series:	Bonn Econ Discussion Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	1 pages long
Classification:	D82 - Asymmetric and Private Information ; D86 - Economics of Contract: Theory
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005032228