The Threat of Insurance On the Robustness of Principal-Agent Models (original) (raw)

The traditional principal-agent model assumes that the principal offers an exclusive contract to the agent. This paper shows that the standard results are not robust to the introduction of additional contracting opportunities for the agent. We analyze equilibria of an extended game with the presence of additional players who might trade risk away from the agent. There are settings (and parameter values) in which the principal is worse off, total welfare is lower, and suboptimal effort is implemented in equilibrium. There are other settings in which the principal can manage to be as well off as in the standard case, but in these cases he has to offer a steeper contract for performance. These findings may call for a revision of some previous theoretical and applied conclusions.