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Risk Aversion and Incentives

Marie-Cecile Fagart and Claude Fluet ()

Cahiers de recherche from CIRPEE

Abstract: We consider decision-makers facing a risky wealth prospect. The probability distribution depends on pecuniary effort, e.g., the amount invested in a venture or prevention expenditures to protect against accidental losses. We provide necessary local conditions and sufficient global conditions for greater risk aversion to induce more (or less) investment or to have no effect. We apply our results to incentives in the principal-agent framework when differently risk averse agents face the same monetary incentives.

Keywords: Expected utility; risk aversion; comparative statics; mean utility preserving increase in risk; location independent risk (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-mic and nep-upt
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