Skip to main content

Sharing with a Risk-Neutral Agent

(PDF PDF icon)

In the standard solution to the principal-agent problem, a risk-neutral agent bears all the risk. The author shows that, in fact, multiple solutions exist, and often the risk-neutral agent is not the sole bearer of risk. As risk aversion approaches zero, the unique risk-averse solution converges to the risk-neutral solution, wherein the agent bears the least amount of risk. Even a small degree of risk aversion can result in agents bearing significantly less risk than the standard solution suggests.

Suggested citation: Haubrich, Joseph. “Sharing with a Risk-Neutral Agent,” Federal Reserve Bank of Cleveland, Economic Review, vol. 37, no. 1, pp. 02-08, 03.01.2001.

Upcoming EventsSEE ALL