Robust Contract Designs: Linear Contracts and Moral Hazard

2020 ◽  
Vol 68 (5) ◽  
pp. 1457-1473 ◽  
Author(s):  
Yimin Yu ◽  
Xiangyin Kong
Keyword(s):  
Moral Hazard ◽  
Model Uncertainty ◽  
Alternative Explanation ◽  
Incentive Compatibility ◽  
Chief Executive ◽  
Decision Criterion ◽  
Worst Case ◽  
Incomplete Model ◽  
General Effort ◽  
Shed Light

Linear contracts and their variants are quite popular in practice, for example, salesforce incentives and chief executive officer compensation. However, agency theory typically stipulates complex contract forms. Yimin Yu and Xiangyin Kong provide an alternative explanation for the popularity of linear contracts: the robustness to model uncertainty renders the linear or generalized linear forms of the contracts under moral hazard. They adopt the worst-case decision criterion, and robust incentive compatibility to ensure that the agent always behaves. The results are robust to general effort-contingent distributions and the risk-averse agent. These findings also shed light on how to design robust contracts when firms are facing model uncertainty or incomplete model information.

scholarly journals A Satisficing Framework for Environmental Policy Under Model Uncertainty

2021 ◽  
Author(s):  
Stergios Athanasoglou ◽  
Valentina Bosetti ◽  
Laurent Drouet
Keyword(s):  
Environmental Policy ◽  
Model Uncertainty ◽  
Probability Distributions ◽  
Success Probability ◽  
Economic Assessment ◽  
Decision Criterion ◽  
Probability Criterion ◽  
Change Context ◽  
Future Consumption ◽  
Point Of Departure

AbstractWe propose a novel framework for the economic assessment of environmental policy. Our main point of departure from existing work is the adoption of a satisficing, as opposed to optimizing, modeling approach. Along these lines, we place primary emphasis on the extent to which different policies meet a set of goals at a specific future date instead of their performance vis-a-vis some intertemporal objective function. Consistent to the nature of environmental policymaking, our model takes explicit account of model uncertainty. To this end, the decision criterion we propose is an analog of the well-known success-probability criterion adapted to settings characterized by model uncertainty. We apply our criterion to the climate-change context and the probability distributions constructed by Drouet et al. (2015) linking carbon budgets to future consumption. Insights from computational geometry facilitate computations considerably and allow for the efficient application of the model in high-dimensional settings.

Optimal Reciprocal Reinsurance under VaR or TVaR Constraint

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Hung-Hsi Huang ◽  
Ching-Ping Wang
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Moral Hazard ◽  
Value At Risk ◽  
Incentive Compatibility ◽  
Regular Form ◽  
Optimal Reinsurance ◽  
The Common ◽  
Risk Constraint ◽  
Management Requirement

Abstract Most existing researches on optimal reinsurance contract are based on an insurer’s viewpoint. However, the optimal reinsurance contract for an insurer is not necessarily to be optimal for a reinsurer. Hence, this study aims to develop the optimal reciprocal reinsurance which satisfies the benefits of both the insurer and reinsurer. Additionally, due to legislative restriction or risk management requirement, the wealth of insurer and reinsurer are frequently imposed upon a VaR (Value-at-Risk) or TVaR (Tail Value-at-Risk) constraint. Therefore, this study develops an optimal reciprocal reinsurance contract which maximizes the common benefits (evaluated by weighted addition of expected utilities) of the insurer and reinsurer subject to their VaR or TVaR constraints. Furthermore, for avoiding moral hazard problem, the developed contract is additionally restricted to a regular form or incentive compatibility (both indemnity schedule and retained loss schedule are continuously nondecreasing).

scholarly journals Fighting with the Lernean Hydra: Greek Humanitarian Crisis Enters Worst-Case Scenario. Comment on: Joseph, L.; Ismail, S.A.; Gunst, M.; Jarman, K.; Prior, D.; Harris, M.; Abbara, A. A Qualitative Research Study Which Explores Humanitarian Stakeholders’ Views on Healthcare Access for Refugees in Greece. Int. J. Environ. Res. Public Health 2020, 17, 6972

2020 ◽  
Vol 17 (21) ◽  
pp. 8253
Author(s):  
Ourania S. Kotsiou ◽  
Panagiotis Kotsios ◽  
Konstantinos I. Gourgoulianis ◽  
Vaios Kotsios
Keyword(s):  
Research Study ◽  
Healthcare Access ◽  
Point Of View ◽  
Case Scenario ◽  
Humanitarian Crisis ◽  
Worst Case ◽  
Qualitative Research Study ◽  
Humanitarian Response ◽  
Key Stakeholders ◽  
Shed Light

Liz Joseph and collaborators shed light upon the real challenges of securing health during the Greek humanitarian crisis from the point of view of the key stakeholders in healthcare access, reflecting the need to reform a range of different contexts and types of humanitarian response [...]

Standing in Line

2011 ◽  
Vol 4 (3) ◽  
pp. 219-223
Author(s):  
Sharif Islam
Keyword(s):  
Immigration Law ◽  
Worst Case ◽  
Professional Background ◽  
The Road ◽  
The Past ◽  
Personal Experiences ◽  
The World ◽  
Different Types ◽  
Shed Light

Over the past two decades, immigration receiving states have resorted to extraordinary legal, political, spatial tactics to curtail and prevent different types of migrants from legally entering the states. Some of these processes increased the number of undocumented and unauthorized immigrants in certain countries. These processes also lead to enormous personal sacrifices and hardships for families across the world. My personal experiences are probably not the worst case due to my educational and professional background, although there were few bumps in the road. Some of the following notes, I hope, will shed light on the personal experiences dealing with immigration law and processes.

scholarly journals The effect of model uncertainty on cooperation in sensorimotor interactions

2013 ◽  
Vol 10 (87) ◽  
pp. 20130554 ◽  
Author(s):  
J. Grau-Moya ◽  
E. Hez ◽  
G. Pezzulo ◽  
D. A. Braun
Keyword(s):  
Model Uncertainty ◽  
Probabilistic Models ◽  
Important Determinant ◽  
Human Subjects ◽  
Risk Sensitivity ◽  
Cooperative Solution ◽  
Worst Case ◽  
Uncertainty Model ◽  
Risk Sensitive ◽  
Sensorimotor Interactions

Decision-makers have been shown to rely on probabilistic models for perception and action. However, these models can be incorrect or partially wrong in which case the decision-maker has to cope with model uncertainty. Model uncertainty has recently also been shown to be an important determinant of sensorimotor behaviour in humans that can lead to risk-sensitive deviations from Bayes optimal behaviour towards worst-case or best-case outcomes. Here, we investigate the effect of model uncertainty on cooperation in sensorimotor interactions similar to the stag-hunt game, where players develop models about the other player and decide between a pay-off-dominant cooperative solution and a risk-dominant, non-cooperative solution. In simulations, we show that players who allow for optimistic deviations from their opponent model are much more likely to converge to cooperative outcomes. We also implemented this agent model in a virtual reality environment, and let human subjects play against a virtual player. In this game, subjects' pay-offs were experienced as forces opposing their movements. During the experiment, we manipulated the risk sensitivity of the computer player and observed human responses. We found not only that humans adaptively changed their level of cooperation depending on the risk sensitivity of the computer player but also that their initial play exhibited characteristic risk-sensitive biases. Our results suggest that model uncertainty is an important determinant of cooperation in two-player sensorimotor interactions.

scholarly journals On the Importance of Golden Parachutes

2013 ◽  
Vol 48 (6) ◽  
pp. 1717-1753 ◽  
Author(s):  
Eliezer M. Fich ◽  
Anh L. Tran ◽  
Ralph A. Walkling
Keyword(s):  
Moral Hazard ◽  
Chief Executive Officers ◽  
Chief Executive ◽  
Expected Value ◽  
Personal Gain ◽  
Golden Parachutes ◽  
The Future ◽  
Executive Officers

AbstractIn acquisitions, target chief executive officers (CEOs) face a moral hazard: Any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999–2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia, while acquirer shareholders capture additional rents from target shareholders.

scholarly journals Robust monetary policy in a currency union

2012 ◽  
Vol 59 (2) ◽  
pp. 185-199
Author(s):  
Olga Kuznetsova
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Model Uncertainty ◽  
Currency Union ◽  
Optimal Monetary Policy ◽  
Economic Shocks ◽  
Worst Case ◽  
Attenuation Effect ◽  
Optimal Reaction ◽  
Country Specific

A great number of recent researches have found importance of country specific shocks for optimal monetary policy construction in the context of a currency union. This however has been almost completely overlooked by the analysis of optimal monetary policy under model uncertainty. The main purpose of our work is to fill this gap. By using a model of a two-country currency union with sticky prices, we have derived robust monetary policy that works reasonably well even in the worst case of model perturbations. We find some anti-attenuation effect of uncertainty, and show that the central bank?s optimal reaction to economic shocks becomes more aggressive with an increase in the extent of misspecification.

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