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Sharing With A Risk-Neutral Agent

In the standard solution to the principal-agent problem, a risk-neutral agent bears all the risk. This paper shows that, in fact, multiple solutions exist, and often the risk-neutral agent is not the sole bearer of risk. Furthermore, 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 lead to agents' bearing significantly less risk than the simple solution suggests.

Suggested citation: Haubrich, Joseph, 1993. “Sharing With A Risk-Neutral Agent,” Federal Reserve Bank of Cleveland, Working Paper no. 93-01.

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