Incentive Contracts and Downside Risk Sharing

Sinclair‐Desgagné, Bernard; Spaeter, Sandrine

doi:10.1093/jleo/ewx014

Cited by 6 publications

(1 citation statement)

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“…The expected utility level an agent gets from a particular contract and probability distribution of external factors is determined by the risk preferences of the agent. Hence, risk preferences have an impact on the types of contracts that can be put in place between the principal and the agent (Laffont and Martimort 2009;Sinclair-Desgagné and Spaeter 2017). Agents differ in the amount of downside risk they are willing to bear (Kimball 1990).…”

Section: The Role Of Risk In the Principal-agent Relationshipmentioning

confidence: 99%

Accountability mechanisms in international climate change financing

Basak

Werf

2019

Int Environ Agreements

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This paper uses agency theory to analyse the incentives that a donor (principal) and recipient (agent) face as actors in an accountability regime for the financing of international climate change projects in developing countries. We address the following question: What accountability measures serve to align the incentives of the donor with those of the recipient in climate change financing? We focus on the relationship between the Green Climate Fund as a donor and one of its Accredited Entities as a recipient. We examine the consequences of misaligned incentives and asymmetric information, looking at a specific set of accountability measures, including performance indicators, penalties for poor performance, as well as the role of pressure exerted by civil society organisations (CSOs). We find that the use of imperfect performance indicators can reduce the risk of project failure if they are strongly correlated with adaptation and mitigation impacts. Penalties can have a positive impact on project outcomes, but impose risks upon the agent, which could lead him to refuse the contract for the implementation of the climate change project. The pressure of CSOs was found to have the potential to motivate donors and recipients to become more efficient and effective in their delivery of projects but could also lead to the donor choosing to finance lower-risk projects with fewer climate change benefits. We suggest that accountability requirements need to be carefully balanced with other objectives, including having a diverse set of entities willing to bid for the delivery of projects.

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Section: The Role Of Risk In the Principal-agent Relationshipmentioning

confidence: 99%