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Journal Article

Sharing with a risk-neutral agent


Abstract: In the standard solution to the principal?agent problem, a risk-neutral agent bears all the risk. The author shows that, in fact, multiple solutions exist, and often the risk-neutral agent is not the sole bearer of risk. As risk aversion approaches zero, the unique risk-averse solution converges to the risk-neutral solution, wherein the agent bears the least amount of risk. Even a small degree of risk aversion can result in agents bearing significantly less risk than the standard solution suggests.

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Review

Publication Date: 2001

Issue: Q I

Pages: 2-8