Moral Hazard in Risk-Averse Teams

Eric Bennett Rasmusen, Kelley School of Business, Indiana University

Abstract

Holmstrom (1982) has shown that a non-budget- balancing contract induces a team of risk- neutral agents to choose the first- best effort levels. This is not generally true when agents are risk averse. Furthermore, a"massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.