Correlation neglect, incentives, and welfare

Andreas Klümper and Matthias Kräkel

Economics Letters, 2020, vol. 192, issue C

Abstract: We modify the Holmström–Milgrom model by letting the agent neglect the correlation between performance measures. Whenever true and perceived correlation are sufficiently low, correlation neglect enhances material welfare and expected profit. Otherwise, material welfare diminishes, and the agent may benefit.

Keywords: Behavioral contract theory; Moral hazard; Risk aversion (search for similar items in EconPapers)
JEL-codes: A12 D82 D86 D9 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:192:y:2020:i:c:s0165176520301312

DOI: 10.1016/j.econlet.2020.109171

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