Risk Sharing and Incentives in the Principal and Agent Relationship

  title={Risk Sharing and Incentives in the Principal and Agent Relationship},
  author={Steven Shavell},
  journal={The Bell Journal of Economics},
  • S. Shavell
  • Published 1979
  • Economics
  • The Bell Journal of Economics
This article studies arrangements concerning the payment of a fee by a principal to his agent. For such an arrangement, or fee schedule, to be Pareto optimal, it must implicitly serve to allocate the risk attaching to the outcome of the agent's activity in a satisfactory way and to create appropriate incentives for the agent in his activity. Pareto-optimal fee schedules are described in two cases: when the principal has knowledge only of the outcome of the agent's activity and when he has as… 

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