Risk Aversion, Moral Hazard, and the Principal's Loss

Hector Chade and Virginia Vera de Serio
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Virginia Vera de Serio: Facultad de Ciencias Economicas, Universidad Nacional, http://wpcarey.asu.edu/Directory/stafffaculty.cfm?cobid=2133558

Working Papers from Department of Economics, W. P. Carey School of Business, Arizona State University

Abstract: In their seminal paper on the principal-agent model with moral hazard, Grossman and Hart (1983) show that the loss to the principal from being unable to observe the agent’s action is increasing in the agent’s degree of absolute risk aversion. Their proof is restricted to the case where the number of observable outcomes is equal to two, and uses an argument which is specific to that case. In this note, we provide a different proof that generalizes their result to any (finite) number of outcomes.

JEL-codes: D82 (search for similar items in EconPapers)
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Journal Article: Risk aversion, moral hazard, and the principal's loss (2002)
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