Survey_Laux_2008

Abstract

In a setting similar to that analyzed by Breuer (2005), I show that a joint deductible is optimal if the risk management objective is to accommodate losses by holding costly equity. As a reference case I also analyze the case of proportional loading if the firm’s objective is to accommodate losses. The finding that a joint deductible is optimal in this case resembles the work by Shimpi (2001), Harrington et al. (2002), and Meulbroek (2002). Laux (2001) shows that it can be optimal to combine projects to be managed by one manager in the presence of moral hazard. In this work the manager is risk neutral and protected by limited liability. The objective is to minimize the expected wage payment subject to the manager’s incentive constraints.