Solomonic Separation: Risk Decisions as Productivity Indicators
نویسندگان
چکیده
A principal provides budgets to agents (e.g., divisions of a rm or the principals children) whose expenditures provide her bene ts, either materially or because of altruism. Only agents know their potential to generate bene ts. 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 e¢ ciency by o¤ering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low allocations, the ratio of the more risk-averse types marginal utility to that of the other type is unbounded above (e.g., as with CRRA), the rst-best is approached. A biblical opening enlivens the analysis. JEL-Code: D82
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