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Moral hazard with the (unlikely) possibility of catastrophes

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  • Bednarek, Ziemowit
  • Patel, Pratish

Abstract

Without sacrificing tractability, we analyze the effect of fat-tailed events such as catastrophes on the optimal compensation contract between a principal and an agent. The optimal contract depends on all the moments and not just the variance.

Suggested Citation

  • Bednarek, Ziemowit & Patel, Pratish, 2014. "Moral hazard with the (unlikely) possibility of catastrophes," Economics Letters, Elsevier, vol. 124(3), pages 386-388.
    • Handle: RePEc:eee:ecolet:v:124:y:2014:i:3:p:386-388
    DOI: 10.1016/j.econlet.2014.06.035
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    References listed on IDEAS

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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    2. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. "Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-1632, December.
    3. Ian W. Martin, 2013. "Consumption-Based Asset Pricing with Higher Cumulants," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 745-773.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Moral hazard; Cumulants; Rare disasters; Optimal contract; Skewness;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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