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Optimal Incentives in a Principal-Agent Model with Endogenous Technology

Author

Listed:
  • Marco Marini

    (Department of Computer, Control and Management Engineering, Università "La Sapienza" Roma)

  • Paolo Polidori

    (Department of Law, University of Urbino ?Carlo Bo?)

  • Davide Ticchi

    (IMT Institute for Advanced Studies Lucca)

  • D?sir?e Teobaldelli

    (Department of Law, University of Urbino ?Carlo Bo?)

Abstract

One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher e? ciency are also riskier. Using a modified version of the Holmstrom and Milgrom's (1987) framework, we obtain that lower agent's risk aversion unambiguously leads to higher incentives when the technology function linking e? ciency and riskiness is elastic, while the risk aversion-incentive relation- ship can be positive when this function is rigid.

Suggested Citation

  • Marco Marini & Paolo Polidori & Davide Ticchi & D?sir?e Teobaldelli, 2013. "Optimal Incentives in a Principal-Agent Model with Endogenous Technology," Working Papers 1304, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2013.
    • Handle: RePEc:urb:wpaper:13_04
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    References listed on IDEAS

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    Cited by:

    1. Tyrone T. Lin & Tsai-Ling Liu, 2021. "An Optimal Compensation Agency Model for Sustainability under the Risk Aversion Utility Perspective," JRFM, MDPI, vol. 14(3), pages 1-16, March.

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    More about this item

    Keywords

    Principal-agent; Incentives; Risk aversion; Endogenous technolog;
    All these keywords.

    JEL classification:

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

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