Solomonic Separation: Risk Decisions as Productivity Indicators

Nolan Miller, Alexander Wagner and Richard Zeckhauser

Scholarly Articles from Harvard Kennedy School of Government

Abstract: A principal provides budgets to agents (e.g., divisions of a firm or the principal's children) whose expenditures provide her benefits, either materially or because of altruism. Only agents know their potential to generate benefits. We prove that if the more "productive" agents are also more risk-tolerant (as holds in the sample of individuals we surveyed), the principal can screen agents and bolster target efficiency by offering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low allocations, the ratio of the more risk-averse type's marginal utility to that of the other type is unbounded above (e.g., as with CRRA), the first-best is approached. A biblical opening enlivens the analysis.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in HKS Faculty Research Working Paper Series

Downloads: (external link)
http://dash.harvard.edu/bitstream/handle/1/9946786/RWP12-57_Zeckhauser.pdf (application/pdf)

Related works:
Journal Article: Solomonic separation: Risk decisions as productivity indicators (2013)
Working Paper: Solomonic Separation: Risk Decisions as Productivity Indicators (2012)
Working Paper: Solomonic Separation: Risk Decisions as Productivity Indicators (2012)
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:hrv:hksfac:9946786

Access Statistics for this paper

More papers in Scholarly Articles from Harvard Kennedy School of Government Contact information at EDIRC.
Bibliographic data for series maintained by Office for Scholarly Communication ().