Delegating a Risky Activity via Incentive Contracts and Liability Insurance

Akihiro Watabe

Journal of Institutional and Theoretical Economics (JITE), 2000, vol. 156, issue 4, 625-

Abstract: We examine the importance of agents' private information about their accident proneness and action, when the principal delegates via an optimal auction the undertaking of a risky activity to an agent. A unique feature of our model is that the risk-neutral principal can provide, at no cost, competitively priced liability insurance to the 'winning' risk-neutral agent in order to mitigate their expected cost of delegation. We show that the principal's provision of free coverage has a two-sided effect: the social cost of the risky activity increases, while the principal's informational rent payment to the winning agent decreases.

JEL-codes: D6 D8 K1 (search for similar items in EconPapers)
Date: 2000
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