Bridging finance and behavioral scholarship on agent risk sharing and risk taking

A large volume of research has examined agent risk taking and the contracting problem of risk sharing—the sharing of performance risk across agent and principal—to advance our knowledge of mechanisms that can align the assumed divergent interests and risk preferences of the managerial agent and shareholder principal. This research has been undertaken in two streams—financial economics and behavioral science—that appear to have operated in silos, using different theoretical frameworks and methodological approaches. To identify opportunities for cross-fertilization and to advance future research in both streams, we review the theoretical paradigms and empirical findings deriving from both fields. We also make an assessment of how the combined research efforts of finance and behavioral scholars have progressed in developing our understanding of agent risk taking and mechanisms for achieving agent–principal incentive alignment. Finally, we discuss how this research has influenced the corporate world for better or for worse.

Bridging finance and behavioral scholarship on agent risk sharing and risk taking Articles