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1987•The RAND Journal of EconomicsRequires access

Moral Hazard in Risk-Averse Teams

Eric Rasmusen

Open publisher page 208 citations

Abstract

Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.

About this research paper

What this paper is about

Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.

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OpenAlex reports 208 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.

Key concepts: Moral hazard, Outcome (game theory), Microeconomics, Risk neutral, Economics, Business, Actuarial science, Incentive

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