TY  - JOUR
AU  - Miller,Nolan
AU  - Wagner,Alexander F.
AU  - Zeckhauser,Richard J.
TI  - Solomonic Separation: Risk Decisions as Productivity Indicators
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18634
PY  - 2012
Y2  - December 2012
UR  - http://www.nber.org/papers/w18634
L1  - http://www.nber.org/papers/w18634.pdf
N1  - Author contact info:
Nolan H. Miller
College of Business
University of Illinois at Urbana Champaign
4033 BIF
515 East Gregory Drive
Champaign, IL 61820
Tel: 217/244-2847
E-Mail: nmiller@illinois.edu

Alexander Wagner
University of Zurich - Swiss Finance Institute
Department of Banking and Finance
Plattenstrasse 14
CH-8032 Zurich
Switzerland
E-Mail: alex.wagner@post.harvard.edu

Richard J. Zeckhauser
John F. Kennedy School of Government
Harvard University
79 John F. Kennedy Street
Cambridge, MA  02138
Tel: 617/495-1174
Fax: 617/384-9340
E-Mail: richard_zeckhauser@harvard.edu
AB  - A principal provides budgets to agents (e.g., divisions of a firm or the principal's children) whose expenditures provide her benefits, either materially or because of altruism. Only agents know their potential to generate benefits. We prove that if the more "productive" agents are also more risk-tolerant (as holds in the sample of individuals we surveyed), the principal can screen agents and bolster target efficiency by offering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low allocations, the ratio of the more risk-averse type's marginal utility to that of the other type is unbounded above (e.g., as with CRRA), the first-best is approached. -- A biblical opening enlivens the analysis.
ER  -