TY - JOUR
T1 - Solomonic separation
T2 - Risk decisions as productivity indicators
AU - Miller, Nolan
AU - Wagner, Alexander F.
AU - Zeckhauser, Richard J.
N1 - Funding Information:
Acknowledgments We thank John Pratt for help with the proof of Lemma 1, Carmen Tanner and Michael Kosfeld for help with the survey, Mario Häfeli and Ramona Westermann for research assistance, and the editor, the referee, and participants in various seminars for helpful comments. Wagner thanks the Swiss Finance Institute, the NCCR FINRISK and the University of Zurich Research Priority Program “Finance and Financial Markets” for support.
PY - 2013/6
Y1 - 2013/6
N2 - A principal provides budgets to agents (e.g., divisions of a firm or the principal's children) whose expenditures provide her benefits, either materially or because of altruism. Only agents know their potential to generate benefits. We prove that if the more "productive" agents are also more risk-tolerant (as holds in the sample of individuals we surveyed), the principal can screen agents and bolster target efficiency by offering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low allocations, the ratio of the more risk-averse type's marginal utility to that of the other type is unbounded above (e.g., as with CRRA), the first-best is approached.-A biblical opening enlivens the analysis.
AB - A principal provides budgets to agents (e.g., divisions of a firm or the principal's children) whose expenditures provide her benefits, either materially or because of altruism. Only agents know their potential to generate benefits. We prove that if the more "productive" agents are also more risk-tolerant (as holds in the sample of individuals we surveyed), the principal can screen agents and bolster target efficiency by offering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low allocations, the ratio of the more risk-averse type's marginal utility to that of the other type is unbounded above (e.g., as with CRRA), the first-best is approached.-A biblical opening enlivens the analysis.
KW - Asymmetric information
KW - Capital budgeting
KW - Random mechanisms
KW - Risk aversion
KW - Screening
KW - Target efficiency
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U2 - 10.1007/s11166-013-9168-6
DO - 10.1007/s11166-013-9168-6
M3 - Article
AN - SCOPUS:84879783436
SN - 0895-5646
VL - 46
SP - 265
EP - 297
JO - Journal of Risk and Uncertainty
JF - Journal of Risk and Uncertainty
IS - 3
ER -