A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot observe the manager's effort,which would be the best employment contract?
A)a high-powered incentive contract to elicit maximum effort.
B)a fixed salary.
C)a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk.
D)an incentive scheme that provides maximum incentives and maximum insurance.

Question

Quizplus · Accepted Answer

A moderately powered incentive scheme balances the need to motivate the manager to exert effort while not exposing them to excessive risk, aligning with the risk-averse nature of the manager.

A Risk-Averse Manager Is Hired to Run a Firm for Shareholders