In the single-period principal-agent model:
A)both the employer and the employee are risk-averse.
B)both the employer and the employee are risk-neutral.
C)the employer is risk-averse but the employee is risk-neutral.
D)the employer is risk-neutral but the employee is risk-averse.

Question

Quizplus · Accepted Answer

In the single-period principal-agent model, the employer typically designs a contract that either pays a fixed wage or a wage contingent on the employee's performance. The employer is assumed to be risk-neutral since the company can diversify its employment risks across multiple employees, while the employee is assumed to be risk-averse since they face a single outcome that determines their wage. Therefore, the best choice is D, where the employer is risk-neutral but the employee is risk-averse.

In the Single-Period Principal-Agent Model