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Working Paper

Sharing With A Risk-Neutral Agent

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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.
03.01.1993ISSN 2573-7953 WP 93-01DOI 10.26509/frbc-wp-199301

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Haubrich, Joseph G. 1993. “Sharing With A Risk-Neutral Agent.” Federal Reserve Bank of Cleveland, Working Paper No. 93-01. https://doi.org/10.26509/frbc-wp-199301