THE EFFECTS OF RISK-AVERSION ON PRODUCTION DECISIONS IN DECENTRALIZEDORGANIZATIONS

Authors
ARYA A FELLINGHAM JC YOUNG RA
Citation
A. Arya et al., THE EFFECTS OF RISK-AVERSION ON PRODUCTION DECISIONS IN DECENTRALIZEDORGANIZATIONS, Management science, 39(7), 1993, pp. 794-805
Citations number
29
Categorie Soggetti
Management,"Operatione Research & Management Science
Journal title
Management science → ACNP
ISSN journal
00251909
Volume
39
Issue
7
Year of publication
1993
Pages
794 - 805
Database
ISI
SICI code
0025-1909(1993)39:7<794:TEOROP>2.0.ZU;2-D
Abstract
This paper presents a principal-agent model in which subsequent to con tracting the risk averse agent becomes informed about the production p rocess. Communication of the agent's information is always valuable. T he optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric, leading to an efficiency loss. Comparative statics show tha t the loss in expected production increases as the agent becomes more risk averse.