Incentive Contracts and Efficiency in a Frictional Market PDF Download
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Author: Benoit Julien
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
Principals seek to trade with agents by posting incentive contracts in a search environment. A contract solves the ex ante search problem, and adverse selection and moral hazard ex post. We fully characterise the equilibrium for quasi linear preferences, and derive some comparative statics. If using appropriate transfers the equilibrium allocation is constrained welfare optimal, in contrast to the one-to-one principal-agent problem. Search frictions thus correct that inefficiency because searching requires internalizing the utility of agents. Incentives are weaker than in bilateral contracting, and agents enjoy more efficient risk sharing. With a constraint on transfers search and moral hazard interact and may induce an inefficient allocation; principal competition results in over-insurance of the agents and too little effort in equilibrium.
Author: Benoit Julien
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
Principals seek to trade with agents by posting incentive contracts in a search environment. A contract solves the ex ante search problem, and adverse selection and moral hazard ex post. We fully characterise the equilibrium for quasi linear preferences, and derive some comparative statics. If using appropriate transfers the equilibrium allocation is constrained welfare optimal, in contrast to the one-to-one principal-agent problem. Search frictions thus correct that inefficiency because searching requires internalizing the utility of agents. Incentives are weaker than in bilateral contracting, and agents enjoy more efficient risk sharing. With a constraint on transfers search and moral hazard interact and may induce an inefficient allocation; principal competition results in over-insurance of the agents and too little effort in equilibrium.
Author: Espen R. Moen
Publisher:
ISBN:
Category : Incentives in industry
Languages : en
Pages : 36
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Book Description
Author: Birger Wernerfelt
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Considering a principal-agent model in which the difficulty of the agent's action is better known ex interim than ex ante, we compare two contracting regimes; one with commitment to an ex ante negotiated contract, and one with an ex interim negotiated contract. The ex ante contract can not have too strong incentives, but attempts to negotiate a stronger ex interim contract may result in bargaining failure. The relative efficiency of the two contracting regimes therefore depends on parameter values. The argument can be interpreted as an analysis of the tradeoff between weak incentives in the firm and the possibility of unsuccessful negotiations in the market.
Author: R. Preston Mcafee
Publisher: Heritage
ISBN: 9781487581404
Category : Business & Economics
Languages : en
Pages : 182
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Book Description
Could the existing level of government services by provided at a lower cost? This study presents a convincing argument for incentive contracts as a means to this end. In a typical market economy, payments from the government to firms account for about one-half of government spending (excluding transfer payments). By changing the way in which a government pays the firms from which it procures goods and services, it would be possible to maintain the existing array of government programs at a lower price. The major finding of this study is that governments could significantly reduce their expenditures by making extensive use of incentive contracts where they currently use either fixed-price contracts or cost-plus contracts. An incentive contract shares cost overruns and cost underruns between the government and the contractor according to a predetermined ratio. An incentive contract stimulates competition among the firms bidding for the contract and shares the project's risk between the government and the selected firm, while giving the contractor incentives to keep incurred costs low. In addition to advocating the use of incentive contracts, the study analyses the consequences of preferential treatment for domestic content over foreign content in government procurement, discusses the choice for a government agency between producing a commodity or service in-house and contracting for its provision with a private firm, and examines the experience with contracting of both the Ontario government and the United States Department of Defense in order to draw lessons for government contracting in general.
Author: Jeremy Bertomeu
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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Book Description
Should incentive contracts expose the agent to market-wide shocks? Counter-intuitively, I show that market risk cannot be filtered out from the compensation and managed independently by the agent. Under plausible risk preferences, the principal should offer a contract in which performance pay increases following a favorable market shock. In the aggregate, however, the effect of market risk on individual contracts diversifies away and the agency problem does not directly affect the cost of capital. The analysis suggests caution in interpreting changes in cost of capital in terms of the stewardship role of accounting information.
Author: Robert Gibbons
Publisher:
ISBN:
Category : Compensation management
Languages : en
Pages : 70
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Book Description
This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.
Author: Oliver Fabel
Publisher:
ISBN:
Category : Equilibrium (Economics)
Languages : en
Pages : 284
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Book Description
Author: Edward B. Roberts
Publisher: Forgotten Books
ISBN: 9780666180346
Category : Reference
Languages : en
Pages : 48
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Book Description
Excerpt from Effects of Incentive Contracts in Research and Development: A Preliminary Research Report In the past several years an effort has originated in the Defense Department (and followed by other government agencies) to discourage the use of cost-p1us=fixed fee (cpff) contracts and substitute contractual incentive arrangements. This effort supposedly relies upon the profit motive to reduce requirements for direct government control and to stim ulate better contractor performance and cost estimating. Incentive type contracts are not new in government contracting. Production contracts have been awarded on a fixed price basis for many years. The fixed price contract provides maximum correlation of contract profits with contract cost, and in theory might offer maximum cost incentive. How ever the use of incentive arrangements on r&d contracts is the novel feature of the dod (and nasa) programs of the past several years. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully; any imperfections that remain are intentionally left to preserve the state of such historical works.
Author: Edward P. Lazear
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 18
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Book Description
Labor relations involve incentive problems. The market solves these problems by developing a variety of institutions. This paper describes and assesses the various forms of incentive contracts
Author: Vincent Tena
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
In presence of an agency friction, incentive contracts are designed to align the manager's objectives with those of the owner of the firm. However, the contractual environment is subject to shocks beyond the scope of the manager that impact the future profitability of the firm. These shocks can be due for instance to a strengthening of regulations, changes at the market-level, or the emergence of a new alternative to the manager. Hence, it raises the question how contracts are designed when such shocks are anticipated at the contractual date. In order to understand this effect, we conduct three studies. In the first paper, we explore how an incentive contract evolves at the emergence of automation technologies that can replace the manager in the context of asset management. We study a continuous time principal-agent problem where the performance of an asset is determined by the manager's unobserved effort, and where the automation technology emerges in a uncertain future. Our model suggests that the empirically observed layoffs that accompany the emergence ofautomation technology may have a contractual foundation. For the second study, we explore how changes in the agent's ability to divert cash flow impact an optimal contract design. We build a continuous-time principal-agent model where the agent can divert cash flow out of the owner's sight. While it is straightforward that mitigating the agency friction is valuable for the firm's owner, its effect on the provision of incentives throughout the contractual relationship is unclear. First, our result suggests that the compression of the bonuses at the advent of the shock: the reduction (respectively, increase) of the expected bonus of good (respectively, poor) performers. Second, our analysis also predicts the regulation-induced retention of a poor performer, defined as maintaining an agent in place while his poor performance would have induced his dismissal in the absence of the shock on the benefitof cash-flow diversion. In the third study, we continue the previous investigation with an empirical study. We analyze the Compensation Discussion and Analysis introduced for the 2007 proxy season. We focus on how this reform has impacted the dismissal decision in S&P 500 non-financial firms. We find that the introduction of the CD&A act has significantly reduced the probability of forced CEO dismissal in S&P 500 non-financial firms. While prior literature has shown that exogenous shocks at the industry level impact the dismissal decision, we document that changes in the regulatory environment also matter.
