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Risk aversion, ambiguity aversion and the incentive problem with interim participation constraints

Author

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  • Hongxia Wang
  • Jianli Wang
  • Xinping Xia

Abstract

This work focuses on the effect of the principal's aversion toward both risk and ambiguity on the design of incentive contracts with interim participation constraints. We investigate how the second‐best outputs are affected by the strength of the principal's risk aversion and ambiguity aversion, respectively. Our result implies that the principal with more risk aversion is ready to delegate a bigger production quantity to the inefficient agent. We also show how the principal's aversion to ambiguity affects the production quantity allocated to the inefficient agent and clarify whether ambiguity aversion reinforces the effect of risk aversion.

Suggested Citation

  • Hongxia Wang & Jianli Wang & Xinping Xia, 2019. "Risk aversion, ambiguity aversion and the incentive problem with interim participation constraints," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(4), pages 327-340, December.
    • Handle: RePEc:bla:ijethy:v:15:y:2019:i:4:p:327-340
    DOI: 10.1111/ijet.12172
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    Cited by:

    1. Wong, Kit Pong, 2024. "Optimal nonlinear pricing by a monopoly with smooth ambiguity preferences," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 594-604.
    2. Kit Pong Wong, 2020. "Optimal nonlinear pricing by a regret‐averse monopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1156-1161, October.

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