Risk Sharing and Incentives in the Principal and Agent Relationship
Volume: Volume 10, No. 1
Issue: Spring 1979
Pages: pp. 55-73
Authors: Steven Shavell
Title: Risk Sharing and Incentives in the Principal and Agent Relationship
Abstract: This article studies arrangements concerning the payment of a fee by a principal to his agent. For such an arrangement, or fee schedule, to be Pareto optimal, it must implicitly serve to allocate the risk attaching to the outcome of the agent's activity in a satisfactory way and to create appropriate incentives for the agent in his activity. Pareto-optimal fee schedules are described in two cases: when the principal has knowledge only of the outcome of the agent's activity and when he has as well (possibly imperfect) information about the agent's activity. In each case, characteristics of Pareto-optimal fee schedules are related to the attitudes toward risk of the principal and of the agent.
JEL Classification
Welfare Theory Externalities (0244)
Economics of Uncertainty and Information Game Theory and Bargaining Theory: General (0260)
Market Structure: Industrial Organization and Corporate Strategy (6110)