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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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1935-1704
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Optimal Screening by Risk-Averse Principals

Suren Basov / Xiangkang Yin
Published Online: 2010-03-19 | DOI: https://doi.org/10.2202/1935-1704.1590

This paper studies the effects of principal's risk aversion on principal-agent relationship under hidden information. It finds that the agent's equilibrium effort increases and approaches the efficient level as the principal's risk aversion increases and tends to infinity. Allowing for random participation by the agent, his effort can be efficient even when the principal's risk aversion is finite. For the case of common agency with random participation, it is optimal for the principals to make the agent the residual claimant on profits and the principals' net profits monotonically decrease to zero when their risk aversion tends to infinity.

Keywords: principal-agent model; risk aversion; random participation; common agency

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Published Online: 2010-03-19


Citation Information: The B.E. Journal of Theoretical Economics, ISSN (Online) 1935-1704, DOI: https://doi.org/10.2202/1935-1704.1590.

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[1]
Paulo Barelli, Suren Basov, Mauricio Bugarin, and Ian King
Journal of Mathematical Economics, 2014, Volume 54, Page 74

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