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 on the positive relationship between risk and incentives can be explained....

Riordan and Sappington (JET, 1988) show that in an agency relationship in which the agent’s type is correlated with a public ex post signal, the principal may attain first best (full surplus extraction and efficient output levels) if the agent is faced with a lottery such that each type is...

We analyze a multitasking model with a verifiable routine task and a skill-dependent activity characterized by moral hazard. Contracts negotiated by firm/employee pairs follow from Nash bargaining. High- and low-skilled employees specialize, intermediate productivity employees perform both...

This paper analyzes the optimal contract for a consumer to procure a credence good from an expert when (i) the expert might misrepresent his private information about the consumer's need, (ii) the expert might not choose the requested service since his choice of treatment is non-observable, and...

Becker and Fuest (forthcoming) provides a new explanation for the important and puzzling link between limited liability and corporate taxation. The authors argue that a corporate tax on all entrepreneurs with limited liability is optimal when entrepreneurs can offset potential losses and when...

I consider a moral hazard problem with risk neutral parties, limited liability, and an informed principal. The contractible outcome is correlated to both the principal's private information and the agent's hidden action. In contrast to a model without a privately informed principal or without...

This paper studies the optimal contract for a risk-neutral agency with limited liability. We introduce a novel formulation of the model, in which the contract design problem reduces to a problem of constructing the distribution function of a random variable. This formulation directly balances...

Private firms often withhold information or contest scientific knowledge when public revelation could lead to costly regulations or liability. This concealment leads to negative externalities and public harm. But what if private firms' superior knowledge and self-interest could be harnessed to...

Several empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We...

A popular view of limited liability in financial contracting is that it is the result of societal preferences against excessive penalties. The view of most financial economists is instead that limited liability emerged as an optimal institution when, in the absence of a clear limit on economic...