Agent's Liability Versus Principal's Liability When Attitudes Toward Risk Differ

Posted: 10 Jun 2001

See all articles by Carla Marchese

Carla Marchese

Università del Piemonte Orientale "Amedeo Avogadro", Institute POLIS-DiGSPES

Fabio Privileggi

University of Turin - Department of Economics and Statistics

Alberto Cassone

University of Eastern Piedmont -A. Avogadro - Department of Public Policy and Public Choice

Abstract

This paper studies through an agency model the problem of concealing an illegal activity which benefits the principal. The agent can exert an effort that negatively affects the likelihood of detection. We model such behavior with the assumption that the principal is risk neutral while the agent is risk averse. Two opposite legal regimes are considered: in the first, only the principal is strictly liable; in the second, only the agent is. We show that shifting the liability upon the agent, while the monetary sanction and the probability of detection are kept constant, reduces the principal's net benefit, thus favoring deterrence of wrongdoing. However, the agent's effort in cheating can either increase or decrease. For a specific model we are able to characterize cases in which a reduction in cheating prevails, and shifting the liability upon the agent has clear-cut beneficial effects on compliance.

JEL Classification: K42, D81

Suggested Citation

Marchese, Carla and Privileggi, Fabio and Cassone, Alberto, Agent's Liability Versus Principal's Liability When Attitudes Toward Risk Differ. Available at SSRN: https://ssrn.com/abstract=267831

Carla Marchese (Contact Author)

Università del Piemonte Orientale "Amedeo Avogadro", Institute POLIS-DiGSPES ( email )

Via Cavour 84
15100 Alessandria
Italy
+39-131-283718 (Phone)
+39-131-283704 (Fax)

Fabio Privileggi

University of Turin - Department of Economics and Statistics ( email )

Lungo Dora Siena 100 A
Torino, Turin - Piedmont 10153
Italy
+39-011-6702635 (Phone)
+39-011-6703895 (Fax)

HOME PAGE: http://www.unito.it/persone/fabio.privileggi

Alberto Cassone

University of Eastern Piedmont -A. Avogadro - Department of Public Policy and Public Choice ( email )

Via Cavour 84
15100 Alessandria, 10129
Italy
+390131283714 (Phone)
+390131283704 (Fax)

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