Limited Liability and the Risk-Incentive Relationship

Budde, Jörg und Kräkel, Matthias (März 2008): Limited Liability and the Risk-Incentive Relationship. SFB/TR 15 Discussion Paper No. 232

Abstract

Several empirical findings have challenged the traditional view on the trade-off between risk and incentives. By combining risk aversion and limited liability in a standard principal-agent model the empirical puzzle on the positive relationship between risk and incentives can be explained. Increasing risk leads to a less informative performance signal. Under limited liability, the principal may optimally react by increasing the weight on the signal and, hence, choosing higher-powered incentives.

• Dokumententyp: Paper
• Keywords: moral hazard, limited liability, risk-incentive relationship
• Fakultät: Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems ; Sonderforschungsbereiche > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B4 - Die Gestaltung von Turnieren im Rahmen der Corporate Governance
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: D82, D86
• Sprache: Englisch