Wealth effects and agency costs

• 成果类型: Article
• 署名作者: Chade, Hector; Vera de Serio, Virginia N.
• 署名单位: Arizona State University; Arizona State University-Tempe; University Nacional Cuyo Mendoza
• 刊物名称: GAMES AND ECONOMIC BEHAVIOR
• ISSN/ISSBN: 0899-8256
• DOI: 10.1016/j.geb.2014.02.012
• 发表日期: 2014
• 页码: 1-11
• 关键词: Moral hazard; principal-agent model; CONTRACTS; wealth effects

摘要

We analyze how the agent's initial wealth affects the principal's expected profits in the standard principal-agent model with moral hazard. We show that if the principal prefers a poorer agent for all specifications of action sets, probability distributions, and disutility of effort, then the agent's utility of income must exhibit a coefficient of absolute prudence less than three times the coefficient of absolute risk aversion for all levels of income, thus strengthening the sufficiency result of Thiele and Wambach (1999). Also, we prove that there is no condition on the agent's utility of income alone that will make the principal prefer richer agents. Moreover, we show that, for an interesting class of problems, the principal prefers a relatively poorer agent if agent's wealth is sufficiently large. Finally, we discuss how alternative ways of modeling the agent's outside option affects the principal's preferences for agent's wealth. Published by Elsevier Inc.