Template-Type: ReDIF-Paper 1.0
Title: Limited Liability and the Risk-Incentive Relationship
Author-Name: Jörg Budde
Author-Email: Joerg.Budde@uni-bonn.de
Author-Name: Matthias Kräkel
Author-Email: m.kraekel@uni-bonn.de
Classification-JEL: D82, D86
Keywords: moral hazard, limited liability, risk-incentive relationship
	Abstract: Several empirical findings have challenged the traditional view on
	the trade-off between risk and incentives. By combining risk aversion
	and limited liability in a standard principal-agent model the empiri-
	cal puzzle on the positive relationship between risk and incentives can
	be explained. Increasing risk leads to a less informative performance
	signal. Under limited liability, the principal may optimally react by in-
	creasing the weight on the signal and, hence, choosing higher-powered
	incentives.
Note: 
Length: 13
Creation-Date: 2008-03
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse6_2008.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse6_2008