Limited Liability and the Risk-Incentive Relationship

Arbeitspapier

Several empirical findings have challenged the traditional view on the trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empiri- cal puzzle on the positive relationship between risk and incentives can be explained. Increasing risk leads to a less informative performance signal. Under limited liability; the principal may optimally react by in- creasing the weight on the signal and; hence; choosing higher-powered incentives.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bonn Econ Discussion Papers ; No. 6/2008

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Economics of Contract: Theory
• Subject: moral hazard ; limited liability ; risk-incentive relationship ; Moral Hazard ; Beschränkte Haftung ; Leistungsanreiz ; Risikoaversion ; Agency Theory ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Budde, Jörg ; Kräkel, Matthias
• Event: Veröffentlichung
• (who): University of Bonn, Bonn Graduate School of Economics (BGSE)
• (where): Bonn
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/27167
• Last update: 10.03.2025, 11:44 AM CET