Instance a result-dependent contract promotes choices because of the coalignment of one’s agent’s needs with that from the primary, but on price of move chance to the broker. The situation of exposure comes up while the effects are only partially a aim of habits. Bodies guidelines, economic climate, rival tips, technological change, and so on, could potentially cause unmanageable differences in outcomes. The fresh new resulting outcome uncertainty brings up not merely the inability to preplan, also risk that have to be borne because of the some body. Whenever consequences suspicion try low, the expenses off progressing exposure on agent are low and you will outcome-established deals was attractive. Yet not, while the uncertainty develops, it becomes increasingly costly to move risk regardless of the inspirational pros off benefit-founded agreements. For the authoritative terms,
This easy service model might have been revealed in varying means of the of many writers (elizabeth.grams., Demski Feltham, 1978; Harris Raviv, 1979; Holmstrom, 1979; Shavell, 1979). not, the center away from dominant-agent principle is the exchange-regarding anywhere between (a)the expense of measuring conclusion and you may (b) the cost of calculating effects and you may move risk into agent.
Lots of extensions to that particular simple design are you can easily. A person is to unwind the assumption out of a threat-averse agent (e.grams., Harris Raviv, 1979). Lookup (MacCrimmon Wehrung, 1986) suggests that somebody are different extensively within exposure attitudes.