The problem of designing tournament contracts under limited liability and alternative performance measures is considered. Under risk neutrality, only the best performing agent receives an extra premium if the liability constraint becomes binding. Under risk aversion, more than one prize is...

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 empirical puzzle ont hepositive relationship between risk and incentives can be explained....