The Effects of Risk Aversion on Production Decisions in Decentralized Organizations

Anil Arya, John C. Fellingham and Richard A. Young
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Anil Arya: Department of Accounting and MIS, College of Business, The Ohio State University, 1775 College Road, Columbus, Ohio 43210-1399
John C. Fellingham: Department of Accounting and MIS, College of Business Administration, Pennsylvania State University, University Park, Pennsylvania 16802-1912
Richard A. Young: Department of Accounting and MIS, College of Business, The Ohio State University, 1775 College Road, Columbus, Ohio 43210-1399

Management Science, 1993, vol. 39, issue 7, 794-805

Abstract: This paper presents a principal-agent model in which subsequent to contracting the risk averse agent becomes informed about the production process. Communication of the agent's information is always valuable. The optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric, leading to an efficiency loss. Comparative statics show that the loss in expected production increases as the agent becomes more risk averse.

Keywords: agency theory; asymmetric information; efficiency loss; risk aversion (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:39:y:1993:i:7:p:794-805

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