Risk-Taking and Simple Contracts

Economics

Speaker:George Georgiadis, Northwestern University
Date: Friday 25 November 2016
Time: 10.30
Location: Syndicate Room C, Building One

Further details

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.