Aggregate and Idiosyncratic Risk and the Behavior of Individual Preferences under Moral Hazard

Marcelo Bianconi

No 410, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

Abstract: We consider the effect of alternative individual preference towards effort conditional on aggregate risk in a principal-agent relationship under moral hazard. We find that agents can explore a negative correlation between individual preference towards effort and aggregate risk to further diversify idiosyncratic risk and increase expected utility under moral hazard. The variation of individual preference towards effort may mitigate the impact of moral hazard on the risk premium, but we find this to be quantitatively small.

Keywords: moral hazard; disutility of effort; incomplete contract; meanvariance tradeoff (search for similar items in EconPapers)
JEL-codes: D8 D82 E0 G12 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cfn and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:tuf:tuftec:0410

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