Risk-Taking and Simple Contracts
|Speaker:||George Georgiadis, Northwestern University|
|Date: ||Friday 25 November 2016|
|Location: ||Syndicate Room C, Building One|
A principal motivates an agent who can both exert costly effort and costlessly add noise to the resulting output. If the agent is risk-neutral and protected by limited liability, then a linear contract implements any effort level at maximum profit, and every profit-maximizing contract has a linear concave closure. If the agent is risk averse, we characterize profit-maximizing contracts and provide conditions under which the agent’s payoff is linear or strictly concave in output. We extend our model to analyze costly risk-taking, and reinterpret it as a dynamic setting in which the agent can manipulate the timing of her output.