Taking risk away from risk taking: decision insurance in organizations

We present a new mechanism for encouraging risk taking within organizations that relies on the provision of decision insurance to managers. Since insurance increases the likelihood of free riding, we also introduce a technique that mitigates this moral hazard by automatically identifying the social network around the manager and using it as a monitoring group. We show that three possible regimes exist. In the first one, managers contribute to production but avoid risky projects. In the second, managers take on risky projects without free riding. In the third, they free ride. We establish the conditions for the appearance of each of these regimes and show how to adjust the mechanism parameters so as to get the highest expected payoff for the firm in spite of its risk-adverse managers.