Binary payment schemes: Moral hazard and loss aversion

Arbeitspapier

We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to Köszegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully contingent contract. The logic is that, due to the stochastic reference point, increasing the number of different wages reduces the agent's expected utility without providing strong additional incentives. Moreover, for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Preprints of the Max Planck Institute for Research on Collective Goods ; No. 2010,38

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Personnel Management; Executives; Executive Compensation ; Personnel Economics: Compensation and Compensation Methods and Their Effects
• Subject: Vergütungssystem ; Asymmetrische Information ; Moral Hazard ; Risikoaversion ; Prinzipal-Agent-Theorie ; Vertragstheorie ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Herweg, Fabian ; Müller, Daniel ; Weinschenk, Philipp
• Event: Veröffentlichung
• (who): Max Planck Institute for Research on Collective Goods
• (where): Bonn
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/57473
• Last update: 10.03.2025, 11:42 AM CET