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Risk Sharing and Incentives in the Principal and Agent Relationship
The Bell Journal of Economics
Vol. 10, No. 1 (Spring, 1979), pp. 55-73
Published by: RAND Corporation
Stable URL: http://www.jstor.org/stable/3003319
Page Count: 19
You can always find the topics here!Topics: Risk aversion, Fees, Fee schedule, Expected utility, Pareto efficiency, Homeowners insurance, Accidents, Financial risk, State of nature, Strict liability
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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.
The Bell Journal of Economics © 1979 RAND Corporation