Decision Sciences
3 years ago

Study reveals how limited liability leads to efficient agent pooling.

Games and Economic Behavior
Limited liability and non-responsiveness in agency models
Henrique Castro-Pires, Humberto Moreira

Paper Summary

The article explores how a boss can offer contracts to a worker to maximize efficiency, even when the worker is cautious and the boss has limited liability. They found that having a limited liability rule can lead to grouping of the most effective worker types. In some cases, it's best to offer just one contract, no matter the worker's caution level or type distribution.

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