Principal-Agent Contracts under the Threat of Insurance

Mariano Tommasi and Federico Weinschelbaum

Journal of Institutional and Theoretical Economics (JITE), 2007, vol. 163, issue 3, 379-393

Abstract: We show that standard principal-agent results are not robust to the introduction of additional contracting opportunities for the agent. We analyze extended games including additional players who might trade risk away from the agent. For some settings and parameter values, the principal is worse off, and total welfare is lower. In some cases lower effort is implemented. The principal's contract, when high effort is implemented, is steeper than in the standard model. In some settings, the agent unwinds part of those incentives through additional trades. These findings may call for a revision of some previous theoretical and applied conclusions.

JEL-codes: C72 D82 J33 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (7)

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Working Paper: Principal-Agents Contracts Under the Threat of Insurance (2004)
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