Moral hazard and risk-sharing: risk-taking as an incentive tool

Mohamed Belhaj (mbelhaj@centrale-marseille.fr), Renaud Bourlès (renaud.bourles@centrale-marseille.fr) and Frédéric Deroïan (frederic.deroian@univ-amu.fr)

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Abstract: We examine how moral hazard impacts risk-sharing when risk-taking can be part of the mechanism design. In a two-agent model with binary effort, we show that moral hazard always increases risk-taking (that is the amount of wealth invested in a risky project) whereas the effect on risk-sharing (the amount of wealth transferred between agents) is ambiguous. Risk-taking therefore appears as a useful incentive tool. In particular, in the case of preferences exhibiting Constant Absolute Risk Aversion (CARA), moral hazard has no impact on risk-sharing and risk-taking is the unique mechanism used to solve moral hazard. Thus, risk-taking appears to be the prevailing incentive tool.

Keywords: Risk-Taking; Informal Insurance; Moral Hazard (search for similar items in EconPapers)
Date: 2010-08-31
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00512779v1
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Risk-Taking and Risk-Sharing Incentives under Moral Hazard (2014)
Working Paper: Risk-Taking and Risk-Sharing Incentives under Moral Hazard (2014)
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