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The B.E. Journal of Theoretical Economics

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Optimal Screening by Risk-Averse Principals

Suren Basov
  • 1La Trobe University,
/ Xiangkang Yin
  • 2La Trobe University,
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

About the article

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. Export Citation

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