Moral hazard in investment and endogenous risk taking

- I study a dynamic moral hazard model with endogenous risk taking.
- High-risk taking may enforce incentive provisions and raises the firm value.
- A firm switches to high-risk taking after bad performances.

I study a dynamic moral hazard model with endogenous risk taking, in which exposing the firm to greater risks could align the manager's private benefit with that of the owner and thus enhance the incentive provision.