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Indiana University Bloomington

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Explore Business Horizons, the Kelley School's
bimonthly journal publishing original articles of interest to business academicians and practitioners. Marc J. Dollinger, professor of business administration, serves as editor-in-chief.

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Moral Hazard in Risk-Averse Teams

1987, Rand (Bell) Journal of Economics

Eric Bennett Rasmusen

Abstract

Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.

Citation

Rasmusen, Eric Bennett (1987), "Moral Hazard in Risk-Averse Teams," RAND Journal of Economics, Vol. 18, Fall, 428-435.