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Aggregate and Idiosyncratic Risk and the Behavior of Individual Preferences under Moral Hazard

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  • Marcelo Bianconi

Abstract

We consider the effect of alternative individual preference towards effort conditional on aggregate risk in a principal-agent relationship under moral hazard. We find that agents can explore a negative correlation between individual preference towards effort and aggregate risk to further diversify idiosyncratic risk and increase expected utility under moral hazard. The variation of individual preference towards effort may mitigate the impact of moral hazard on the risk premium, but we find this to be quantitatively small.

Suggested Citation

  • Marcelo Bianconi, 2004. "Aggregate and Idiosyncratic Risk and the Behavior of Individual Preferences under Moral Hazard," Discussion Papers Series, Department of Economics, Tufts University 0410, Department of Economics, Tufts University.
    • Handle: RePEc:tuf:tuftec:0410
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    More about this item

    Keywords

    moral hazard; disutility of effort; incomplete contract; meanvariance tradeoff;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E0 - Macroeconomics and Monetary Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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