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Risk Aversion, Moral Hazard, and the Principal's Loss

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Abstract

In their seminal paper on the principal-agent model with moral hazard, Grossman and Hart (1983) show that the loss to the principal from being unable to observe the agent’s action is increasing in the agent’s degree of absolute risk aversion. Their proof is restricted to the case where the number of observable outcomes is equal to two, and uses an argument which is specific to that case. In this note, we provide a different proof that generalizes their result to any (finite) number of outcomes.

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  • Hector Chade & Virginia Vera de Serio, "undated". "Risk Aversion, Moral Hazard, and the Principal's Loss," Working Papers 2133303, Department of Economics, W. P. Carey School of Business, Arizona State University.
    • Handle: RePEc:asu:wpaper:2133303
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    Cited by:

    1. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    2. Flavia Mengarelli & Laura Moretti & Valeria Faralla & Philippe Vindras & Angela Sirigu, 2014. "Economic Decisions for Others: An Exception to Loss Aversion Law," PLOS ONE, Public Library of Science, vol. 9(1), pages 1-6, January.
    3. Jung, Jin Yong, 2022. "Effects of changes in preferences in moral hazard problems," Journal of Economic Theory, Elsevier, vol. 205(C).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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