Limited Liability and the Risk-Incentive Relationship

Jörg Budde () and Matthias Kräkel ()

Bonn Econ Discussion Papers from University of Bonn, Germany

Keywords: moral hazard; limited liability; risk-incentive relationship 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 empiri- cal 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 in- creasing the weight on the signal and; hence; choosing higher-powered incentives. (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2008-03
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Working Paper: Limited Liability and the Risk-Incentive Relationship (2008)
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