Risk aversion, prudence, and compensation
研究了不同薪酬合同对风险厌恶和审慎管理者的激励差异，发现凹合同激励风险厌恶者，凸合同受审慎者青睐，有助于解释股票期权的普遍性。
In a standard principal-agent setting, we use a comparative approach to study the incentives provided by different types of compensation contracts, and their valuation by managers with utility function u who are risk averse ( u ′>0) and prudent ( u ′′>0). We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. This is because concave contracts concentrate incentives where the marginal utility of risk averse managers is highest, while convex contracts protect against downside risk. Thus, managerial prudence can contribute to explain the prevalence of stock-options in executive compensation. However, convex contracts are not optimal when the principal is sufficiently prudent relative to the manager.