Optimal Wage Contracts Under Asymmetric Information and Moral Hazard When Investment Decisions are Delegated
18 Pages Posted: 22 Mar 2004
Date Written: May 2000
In this paper, I derive the optimal wage contract when risky investment decisions are delegated by a risk-averse firm to risk-neutral agents. The firm does not know the probability distribution over the returns of any investment made by an agent. It knows only the first two moments and the bounds of return realizations of the different positive NPV investment opportunities that can be discovered by the agents. Moral hazard with respect to investments made by agents, who are protected by limited liability, is possible. I show that the optimal wage contract is simple under conditions of severe asymmetric information and moral hazard.
Keywords: Delegated Portfolio decisions, Optimal Wage Contract
JEL Classification: G20, G31
Suggested Citation: Suggested Citation