Repeated Moral Hazard Under Limited Liability PDF Download
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Author: Jürgen Bierbaum
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper studies the incentives that arise in a two-period agency relationship with moral hazard when agents are subject to limited liability. Since the existence of limited liability creates rent the principal can motivate an agent by credibly threatening him to be fired. It is shown that a combination of a two-period contract, where the agent is fired after period one in case of poor performance and retained otherwise, and a one-period contract optimally implements high effort. In particular, this combination is strictly better than a two-period contract, where the agent is retained in period two for sure. Moreover, there is a combination of one-period contracts that is equivalent to the optimal combination. While the second-period contract is the same as the optimal contract in the static model, the first-period contract pays a lower bonus in case of success. In an extension of the model "learning by doing" is considered. It turns out that the ranking of contracts is reversed if the increase in revenues due to "learning by doing" is sufficiently strong. In addition, a commitment problem arises which makes short-term contracting strictly worse than long-term contracting.
Author: Jürgen Bierbaum
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper studies the incentives that arise in a two-period agency relationship with moral hazard when agents are subject to limited liability. Since the existence of limited liability creates rent the principal can motivate an agent by credibly threatening him to be fired. It is shown that a combination of a two-period contract, where the agent is fired after period one in case of poor performance and retained otherwise, and a one-period contract optimally implements high effort. In particular, this combination is strictly better than a two-period contract, where the agent is retained in period two for sure. Moreover, there is a combination of one-period contracts that is equivalent to the optimal combination. While the second-period contract is the same as the optimal contract in the static model, the first-period contract pays a lower bonus in case of success. In an extension of the model "learning by doing" is considered. It turns out that the ranking of contracts is reversed if the increase in revenues due to "learning by doing" is sufficiently strong. In addition, a commitment problem arises which makes short-term contracting strictly worse than long-term contracting.
Author: Susanne Ohlendorf
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Author: Susanne Ohlendorf
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ISBN:
Category : Limited liability
Languages : en
Pages : 0
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Author: Steven M. Matthews
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Author: Steven A. Matthews
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ISBN:
Category :
Languages : en
Pages : 40
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Author: Rohan Pitchford
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Category :
Languages : en
Pages : 18
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Author: Marie-Laure Djelic
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Category :
Languages : en
Pages : 40
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Book Description
The principle of limited liability is one of the defining characteristics of modern corporate capitalism. It is also, we argue in this paper, a powerful structural source of moral hazard. Engaging in a double conceptual genealogy, we investigate how the concepts of moral hazard and limited liability were created and diffused over time. We highlight two very similar but parallel paths of emergence, moral contestation and eventual institutionalization, and outline how the two notions have become connected through time, showing clear elective affinities between both concepts and their respective evolution. Going one step further, we suggest that both concepts have come to be connected through time. In the context of contemporary capitalism, limited liability has to be understood, we argue, as a powerful structural source of moral hazard. In conclusion, we propose that this structural link between limited liability and moral hazard is an important explanatory factor of the recent financial crisis and a seemingly intractable characteristic of modern corporate capitalism.
Author: Felipe Balmaceda
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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This article studies a principal-agent problem with discrete outcome and effort level spaces. The principal and the agent are risk neutral and the latter is subject to limited liability. We consider the ratio between the first-best social welfare and the social welfare arising from the principal's optimal pay-for-performance contract, i.e., the welfare loss ratio. In the presence of moral hazard, we provide simple parametric bounds on the welfare loss ratio of a given instance of the problem, and then study the worst-case welfare loss ratio among all problem instances with a fixed number of effort and outcome levels. Key parameters for these bounds are the number of possible effort levels and the likelihood ratio evaluated at the highest outcome. As extensions, we also look at linear contracts and at cases with multiple identical tasks. Our work constitutes an initial attempt to quantify the losses arising from moral hazard problems when the agent is subject to limited liability, and shows that these losses are non-negligible in the worst case (e.g., the welfare loss can approach 100% when the number of possible effort levels is large).
Author: Anindya Banerjee
Publisher:
ISBN:
Category : Corporations
Languages : en
Pages : 36
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Author: Georges Dionne
Publisher: Springer Science & Business Media
ISBN: 1461401550
Category : Business & Economics
Languages : en
Pages : 1133
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Book Description
This new edition of the Handbook of Insurance reviews the last forty years of research developments in insurance and its related fields. A single reference source for professors, researchers, graduate students, regulators, consultants and practitioners, the book starts with the history and foundations of risk and insurance theory, followed by a review of prevention and precaution, asymmetric information, risk management, insurance pricing, new financial innovations, reinsurance, corporate governance, capital allocation, securitization, systemic risk, insurance regulation, the industrial organization of insurance markets and other insurance market applications. It ends with health insurance, longevity risk, long-term care insurance, life insurance financial products and social insurance. This second version of the Handbook contains 15 new chapters. Each of the 37 chapters has been written by leading authorities in risk and insurance research, all contributions have been peer reviewed, and each chapter can be read independently of the others.
