Without sacrificing tractability, we analyze the effect of fat-tailed events such as catastrophes on the optimal compensation contract between a principal and an agent. The optimal contract depends on all the moments and not just the variance.

Kim (1995) provides a sufficient condition to rank information systems when the first-order approach is valid. The basis for the condition is the comparison of the likelihood ratio distributions. I show, first, that Kim’s criterion is not necessary when the limited liability of the agent...

In an agency model with moral hazard and limited liability, we show that the provision of perks can be inefficient, even if perks are contractible. Interestingly, there can be over- as well as underinvestment in perks. We also demonstrate that perks may actually harm the agent, although perks...