Limited Liability and the Risk-Incentive Relationship

Jörg Budde and Matthias Kräkel

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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 empirical 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 increasing the weight on the signal and, hence, choosing higher-powered incentives.

Keywords: moral hazard; limited liability; risk-incentive relationship (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-cta
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Limited liability and the risk–incentive relationship (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:232

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