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

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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