Moral Hazard in Risk-Averse Teams
Volume: Volume 18, No. 3
Issue: Autumn 1987
Pages: pp. 428-435
Authors: Eric Rasmusen
Title: Moral Hazard in Risk-Averse Teams
Abstract: Holmström (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.
"No, they have no railroad accidents to speak of in France. But why? Because when one occurs, somebody has to hang for it! Not hang, maybe, but be punished at least with such vigor of emphasis as to make negligence a thing to be shuddered at by railroad officials for many a day thereafter. `No blame attached to the officers'--that lying and disaster-breeding verdict so common to our soft-hearted juries, is seldom rendered in France."
Mark Twain, The Innocents Abroad, chap. 12
JEL Classification
Microeconomics Agent Theory (0228)
Theory of Uncertainty and Information (0261)