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Quantitative Marketing and Economics

, Volume 2, Issue 4, pp 321–345 | Cite as

Contracting Under Endogenous Risk

  • David Godes
Article

Abstract

Agents make decisions by trading off cost, return and risk. The literature, however, does not consider the impact of risk on action choice. We show that this tradeoff has important implications for the firm. First, the firm may provide no insurance in the salary. Since the agent’s action choice will determine her risk, the salary cannot compensate her for it. Second, the firm may not be able to design an incentive scheme to implement particularly risky actions. Finally, the firm may not be able to design a scheme in which the agent splits her effort across multiple tasks. This is particularly problematic for tasks that are technological substitutes.

incentives compensation agency theory sales force management 

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Copyright information

© Springer Science+Business Media, Inc. 2004

Authors and Affiliations

  1. 1.Assistant ProfessorBusiness Administration at Harvard Business SchoolSoldiers FieldUSA

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