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 empirical 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 increasing the weight on the signal and, hence, choosing higher-powered incentives.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB/TR 15 Discussion Paper ; No. 232

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Economics of Contract: Theory
• Subject: moral hazard ; limited liability ; risk-incentive relationship

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Budde, Jörg ; Kräkel, Matthias
• Event: Veröffentlichung
• (who): Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
• (where): München
• (when): 2008

Further information

• DOI: doi:10.5282/ubm/epub.13320
• Handle: http://hdl.handle.net/10419/94141
• URN: urn:nbn:de:bvb:19-epub-13320-7
• Last update: 10.03.2025, 11:41 AM CET