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Author: | Arya, A. Fellingham, J. Young, R. |
Title: | The effects of risk aversion on production decisions in decentralized organizations |
Journal: | Management Science
1993 : JUL, VOL. 39:7, p. 794-805 |
Index terms: | AGENCY THEORY ASYMMETRIC INFORMATION RISK AVERSION |
Language: | eng |
Abstract: | This paper presents a principal-agent model in which subsequent to contracting the risk averse agent becomes informed about the production process. Communication of the agent's information is always valuable. The optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric, leading to an efficiency loss. Comparative statistics show that loss in expected production increases as the agent becomes more risk averse. |
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