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Optimal Incentives in a Principal–Agent Model with Endogenous Technology

Marco Marini (), Paolo Polidori (), Désirée Teobaldelli () and Davide Ticchi
Additional contact information
Paolo Polidori: Department of Law, University of Urbino, Via Matteotti 1, 61029 Urbino, Italy

Games, 2018, vol. 9, issue 1, 1-13

Abstract: One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper, we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom’s framework, we obtain that lower agent’s risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion–incentive relationship can be positive when this function is rigid.

Keywords: principal–agent; incentives; risk aversion; endogenous technology (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Optimal Incentives in a Principal-Agent Model with Endogenous Technology (2014) Downloads
Working Paper: Optimal Incentives in a Principal-Agent Model with Endogenous Technology (2013) Downloads
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