In a principal-agent problem,if the contract implies that the more risk-averse agent will bear less risk,we can say that this contract exhibits
A) efficiency in risk-bearing.
B) risk sharing is not optimal because the less risk-averse (or risk-neutral) agent should bear none of the risk.
C) risk sharing is not optimal because all risk should be transferred to the most risk-averse agent.
D) risk sharing is not optimal because risk-neutral agents should face no risk.

Question

Quizplus · Accepted Answer

Efficiency in risk-bearing means that the risk is allocated between the principal and agent in a way that minimizes the total costs of bearing risk. In this case, the contract implies that the more risk-averse agent will bear less risk, which implies that the risk is being allocated efficiently between the principal and agent.

In a Principal-Agent Problem,if the Contract Implies That the More