The Purchase of Insurance by a Risk-Neutral Firm for a Risk-Averse Agent
DOI:
https://doi.org/10.1016/1057-0810(91)90033-UAbstract
In the purchase of insurance by a risk-neutral firm for a risk-averse prospective employee, the firm must offer the prospect a compensation package consisting of a fee, or salary, and an insurance policy. In designing this policy, the firm is constrained by the utility function of the prospect: the firm seeks the least-cost compensation package that will induce the prospect to accept the firm’s offer of employment. Because the risk aversion of the prospect constrains the choices of the firm, this problem is referred to as that of an employee-constrained firm (ECF). The specific ECF situation discussed here concerns a firm that wishes to hire an outside
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