Since 2014
The Trade-Off Between Incentives and Endogenous Risk
Brazilian Review of Econometrics
View Archive Info| Field | Value | |
| Title |
The Trade-Off Between Incentives and Endogenous Risk
The Trade-Off Between Incentives and Endogenous Risk |
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| Creator |
Araujo, Aloisio
Moreira, Humberto Tsuchida, Marcos |
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| Description |
Negative relationship between risk and incentives, predicted by standard moral hazard models, has not been confirmed by empirical work. We propose a moral hazard model in which heterogeneous risk-averse agents can control the mean and variance of the profits. The possibility of risk reduction allows the agent’s marginal utility of incentives to be increasing or decreasing in risk aversion. Positive relationship between endogenous risk and incentives is found when marginal utility of incentives and variance are decreasing in risk aversion. Exogenous risk and incentives are negatively related. Those results remain when adverse selection precedes moral hazard.
Negative relationship between risk and incentives, predicted by standard moral hazard models, has not been confirmed by empirical work. We propose a moral hazard model in which heterogeneous risk-averse agents can control the mean and variance of the profits. The possibility of risk reduction allows the agent’s marginal utility of incentives to be increasing or decreasing in risk aversion. Positive relationship between endogenous risk and incentives is found when marginal utility of incentives and variance are decreasing in risk aversion. Exogenous risk and incentives are negatively related. Those results remain when adverse selection precedes moral hazard. |
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| Publisher |
Sociedade Brasileira de Econometria
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| Date |
2007-11-01
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion |
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| Format |
application/pdf
application/pdf |
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| Identifier |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/1524
10.12660/bre.v27n22007.1524 |
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| Source |
Brazilian Review of Econometrics; Vol. 27 No. 2 (2007); 173-198
Brazilian Review of Econometrics; v. 27 n. 2 (2007); 173-198 1980-2447 |
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| Language |
eng
por |
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| Relation |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/1524/964
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/1524/965 |
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