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Seoul Journal of Economics - Vol. 31 , No. 1
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Seoul Journal of Economics - Vol. 31, No. 1, pp. 99-119
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2018
Received 05 Jan 2018 Revised 04 Feb 2018 Accepted 05 Feb 2018

Optimal Contracts for Risk Managers
Jin Yong Jung
Jin Yong Jung, Visiting Researcher, BK21 Education Research Program, Seoul National University, South Korea (econdragon@gmail.com)

Funding Information ▼

JEL Classification: D82, D86, G32, J33, J41

Abstract

This study analyzed the principal-agent problem, in which the agent performs risk management tasks, and considered the cost minimization problem of the principal, the objective of which is to design the cheapest contract inducing a target effort. Our results confirm that a one-step bonus contract should be used, which means that a bonus contract is most efficient for the principal in terms of incentive provision. A new condition to justify the first-order approach in our model was also provided.

Keywords: Risk managers, Risk-reducing effort, Bonus contract
Acknowledgments

This research was supported by the BK21Plus Program (Future-oriented innovative brain raising type, 21B20130000013) funded by the Ministry of Education (MOE, Korea) and National Research Foundation of Korea (NRF).

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