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Delegation of risky activities

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  • Akihiro Watabe

    (Department of Economics, Kanagawa University, 3-27-1 Rokkakubashi Kanagawa-ku, Yokohama, 221-8686, Japan)

Abstract

This paper studies the delegation contract of a risky activity under the presence of adverse selection and moral hazard. The problem is posed as providing incentives from the principal to the agent to enhance the protective action of the agent through payment schemes. Given non-bankruptcy of both the principal and the agent, the principal rewards the agent if no accident occurs but penalizes the agent if an accident occurs. Given bankruptcy of either the principal or the agent, regardless of the agent's risk type, the agent is only rewarded with the same amount of remuneration and not penalized if the accident occurs. The social welfare level resulting from contracting processes depends on the asset levels of both parties and the agent's technology to reduce risks of the activity. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Akihiro Watabe, 2005. "Delegation of risky activities," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(5), pages 331-343.
    • Handle: RePEc:wly:mgtdec:v:26:y:2005:i:5:p:331-343
    DOI: 10.1002/mde.1227
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    References listed on IDEAS

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    1. Newman, Harry A. & Wright, David W., 1990. "Strict liability in a principal-agent model," International Review of Law and Economics, Elsevier, vol. 10(3), pages 219-231, December.
    2. Watabe, Akihiro, 1999. "The effect of liability-sharing rules in delegating hazardous activities," International Review of Law and Economics, Elsevier, vol. 19(3), pages 349-368, September.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    4. Kahan, Marcel, 1996. "The incentive effects of settlements under joint and several liability," International Review of Law and Economics, Elsevier, vol. 16(4), pages 389-395, December.
    5. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
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