Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253477 
Year of Publication: 
2020
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 15 [Issue:] 2 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2020 [Pages:] 715-761
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
Consider an agent who can costlessly add mean-preserving noise to his output. To deter such risk-taking, the principal optimally offers a contract that makes the agent's utility concave in output. If the agent is risk-neutral and protected by limited liability, this concavity constraint binds and so linear contracts maximize profit. If the agent is risk averse, the concavity constraint might bind for some outputs but not others. We characterize the unique profit-maximizing contract and show how deterring risk-taking affects the insurance-incentive tradeoff. Our logic extends to costly risk-taking and to dynamic settings where the agent can shift output over time.
Subjects: 
Risk-taking
contract theory
gaming
JEL: 
M2
M5
D86
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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