Incentive Contracts and Downside Risk Sharing

Bernard Sinclair-Desgagn� and Sandrine Spaeter
Authors registered in the RePEc Author Service: Bernard Sinclair-Desgagné ()

The Journal of Law, Economics, and Organization, 2018, vol. 34, issue 1, 79-107

Abstract: This paper seeks to characterize incentive compensation in a static principal–agent moral hazard setting in which both the principal and the agent are prudent (or downside risk averse). We show that optimal incentive pay should then be “approximately concave” in performance, the approximation being closer the more downside risk averse the principal is compared with the agent. Limiting the agent’s liability would improve the approximation, but taxing the principal would make it coarser. The notion of an approximately concave function we introduce here to describe optimal contracts is relatively recent in mathematics; it is intuitive and translates into concrete empirical implications, notably for the composition of incentive pay packages. We also clarify which measure of prudence—among the various ones proposed in the literature—is relevant to investigate the tradeoff between downside risk sharing and incentives.

JEL-codes: D82 M12 M52 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1093/jleo/ewx014 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Incentive Contracts and Downside Risk Sharing (2018)
Working Paper: Incentive Contracts and Downside Risk Sharing (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jleorg:v:34:y:2018:i:1:p:79-107.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Journal of Law, Economics, and Organization is currently edited by Andrea Prat

More articles in The Journal of Law, Economics, and Organization from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK.
Bibliographic data for series maintained by Oxford University Press ().