Risk Preferences and the Economics of Contracts

Assumptions of risk aversion in modern economics are pervasive, and economists who substitute risk neutrality often do so with an apology. This is particularly true for contract theories, like the principal-agent model. Despite the theoretical prominence of risk aversion, empirical contract studies...

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Bibliographic Details
Published in:The American economic review Vol. 85; no. 2; pp. 447 - 451
Main Authors: Allen, Douglas W., Lueck, Dean
Format: Journal Article
Language:English
Published: Menasha, Wis American Economic Association 01.05.1995
American Economic Assoc
Subjects:
Agricultural land
Apologies
Contract incentives
Contract theory
Contracts
Cost sharing
Costs
Crops
Economic models
Economic theory
Economics
Enforcement
Franchise agreements
Franchising
Mining industry
Moral hazard models
Neutrality
Principal-agent models
Risiko
Risk
Risk aversion
Risk management
Risk preferences
Sharecropping
Studies
Theorie
Theory
Theory of Contracts
Transaction costs
Vertrag
ISSN:0002-8282, 1944-7981
Online Access:Get full text
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Summary:Assumptions of risk aversion in modern economics are pervasive, and economists who substitute risk neutrality often do so with an apology. This is particularly true for contract theories, like the principal-agent model. Despite the theoretical prominence of risk aversion, empirical contract studies tend to ignore risk preferences and focus exclusively on transaction costs, thus stressing specific incentives, enforcement costs, and transaction-specific assets. Accumulated evidence confronting risk-sharing and transaction costs - covering such topics as franchising, gold mining, sharecropping, and timber - actually favors the transaction-cost framework. Risk preferences in contract theory and the evidence failing to support theories relying on risk-averse agents are examined.
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ISSN:0002-8282
1944-7981