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Title:Limited liability and the risk-incentive relationship PDF Logo
Authors:Budde, Jörg
Kräkel, Matthias
Issue Date:2008
Series/Report no.:Bonn econ discussion papers 2008,6
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 ont hepositive 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.
Subjects:moral hazard
limited liability
risk-incentive relationship
JEL:D82
D86
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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