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 efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom’s framework, we obtain that lower agent’s risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion–incentive relationship can be positive when this function is rigid.
Optimal Incentives in a Principal-Agent Model with Endogenous Technology
Paolo Polidori;Désirée Teobaldelli;
2018
Abstract
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 efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom’s framework, we obtain that lower agent’s risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion–incentive relationship can be positive when this function is rigid.File in questo prodotto:
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