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Optimal Incentives in a Principal–Agent Model with Endogenous Technology

Department of Social and Economic Sciences, Sapienza University of Rome; Piazzale Aldo Moro 5, 00185 Rome, Italy
Department of Law, University of Urbino, Via Matteotti 1, 61029 Urbino, Italy
Department of Economics and Social Sciences, Marche Polytechnic University, Piazzale Martelli 8, 60121 Ancona, Italy
Author to whom correspondence should be addressed.
Games 2018, 9(1), 6;
Received: 2 November 2017 / Revised: 25 January 2018 / Accepted: 26 January 2018 / Published: 5 February 2018
PDF [571 KB, uploaded 5 February 2018]


One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper, we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom’s framework, we obtain that lower agent’s risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion–incentive relationship can be positive when this function is rigid. View Full-Text
Keywords: principal–agent; incentives; risk aversion; endogenous technology principal–agent; incentives; risk aversion; endogenous technology
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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Marini, M.A.; Polidori, P.; Teobaldelli, D.; Ticchi, D. Optimal Incentives in a Principal–Agent Model with Endogenous Technology. Games 2018, 9, 6.

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