Variance Reducing Incentives for Labor Contracts

Date

2008-01-01

Author

Erdil, Erkan

Metadata

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This study aims to propose a model for incentive contracts that target to reduce the output variance. It is a general type of various models suggested in the literature in this framework. The most important contribution of the proposed model is that a variety of observed contracts, for instance bonus plans and stock options can be derived from it by varying the assumptions about the observability of the variance-reducing actions and about the agent’s degree of risk aversion. The conclusions suggest that one should not disregard the relevance of variance-reducing actions because disregarding them misleads us about the characteristics of the optimal contract and an inefficient choice of methods to handle moral hazard problem.

Subject Keywords

Incentive contracts, Moral hazard, Mean-variance utility theorem

URI

https://hdl.handle.net/11511/85830

Journal

Yapı Kredi Economic Review

Collections

Department of Economics, Article

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Citation Formats

E. Erdil, “Variance Reducing Incentives for Labor Contracts,” Yapı Kredi Economic Review, pp. 15–28, 2008, Accessed: 00, 2021. [Online]. Available: https://hdl.handle.net/11511/85830.