Risk Attitudes and the Shift of Liability from the Principal to the Agent

Fabio Privileggi, Carla Marchese () and Alberto Cassone ()

POLIS Working Papers from Institute of Public Policy and Public Choice - POLIS

Abstract: This paper studies the problem of illegal behavior within a principal-agent framework. The agent performs an illegal activity which benefits the principal, and can exert an effort that negatively affects the likelihood of detection of the violation.Two opposite legal regimes are considered: in the first, only the risk neutral principal is strictly liable; in the second, only the risk averse agent is The monetary sanction and the probability of detection function are the same in both cases. Our models shows that shifting the liability upon the risk averse agent reduces the principal net benefit, thus favoring deterrence of wrongdoing; however, it can also either increase or reduce the agent effort in cheating. For a specific model we are able to characterize cases in which a reduction in cheating prevails, and shifting the liability upon the agent has clear-cut beneficial effects on compliance.

JEL-codes: D23 D71 D81 (search for similar items in EconPapers)
Pages: 36 pages
Date: 1998-12
New Economics Papers: this item is included in nep-cdm, nep-mic and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:uca:ucapdv:1

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