Delegation of risky activities
Akihiro Watabe
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Akihiro Watabe: Department of Economics, Kanagawa University, 3-27-1 Rokkakubashi Kanagawa-ku, Yokohama, 221-8686, Japan, Postal: Department of Economics, Kanagawa University, 3-27-1 Rokkakubashi Kanagawa-ku, Yokohama, 221-8686, Japan
Managerial and Decision Economics, 2005, vol. 26, issue 5, 331-343
Abstract:
This paper studies the delegation contract of a risky activity under the presence of adverse selection and moral hazard. The problem is posed as providing incentives from the principal to the agent to enhance the protective action of the agent through payment schemes. Given non-bankruptcy of both the principal and the agent, the principal rewards the agent if no accident occurs but penalizes the agent if an accident occurs. Given bankruptcy of either the principal or the agent, regardless of the agent's risk type, the agent is only rewarded with the same amount of remuneration and not penalized if the accident occurs. The social welfare level resulting from contracting processes depends on the asset levels of both parties and the agent's technology to reduce risks of the activity. Copyright © 2005 John Wiley & Sons, Ltd.
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:26:y:2005:i:5:p:331-343
DOI: 10.1002/mde.1227
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