Bilateral Delegation in Contests with Contingent-Fee Contracts
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The primary goal of this paper is to show that the variation in risk aversion plays a key role in the bilateral-delegation contests. We first characterize the comparative statics of the two-period game in which the delegates of risk-averse players work on a pure contingent fee. We show that the more risk-averse player offers the larger contingent fee, thus raising his delegate’s effort level. We also show that the more risk-averse player has a higher-than-50 percent chance of winning. We next consider the case where the players recognize the delegates' non-negative reservation wages. Assuming equal degree of risk-aversion for the players and identical magnitude of reservation wages for the delegates, it is shown that a higher degree of risk-aversion results in overcompensation to the delegates when the delegates' reservation wages are sufficiently low.
Abstract
The primary goal of this paper is to show that the variation in risk aversion plays a key role in the bilateral-delegation contests. We first characterize the comparative statics of the two-period game in which the delegates of risk-averse players work on a pure contingent fee. We show that the more risk-averse player offers the larger contingent fee, thus raising his delegate’s effort level. We also show that the more risk-averse player has a higher-than-50 percent chance of winning. We next consider the case where the players recognize the delegates' non-negative reservation wages. Assuming equal degree of risk-aversion for the players and identical magnitude of reservation wages for the delegates, it is shown that a higher degree of risk-aversion results in overcompensation to the delegates when the delegates' reservation wages are sufficiently low.
참고문헌 (10)
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