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Author: Archawa Paweenawat
Publisher:
ISBN:
Category : Moral hazard
Languages : en
Pages : 108
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Author: Archawa Paweenawat
Publisher:
ISBN:
Category : Moral hazard
Languages : en
Pages : 108
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Author: David S. Bizer
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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The standard Principal-Agent (PA) model assumes that the principal can control the agent's consumption profile. In an intertemporal setting, however, Rogerson (1985a) shows that given the optimal PA contract, the agent has an unmet precautionary demand for savings. Thus the standard PA model is invalid if the agent has access to credit markets. In this paper we generalize the standard PA model to allow for saving and borrowing by the agent. We show that the impact of such access critically depends upon the treatment of default. If default is notpermitted, efficiency is strictly reduced by the introduction of credit markets, and the equilibrium level of borrowing or saving is indeterminate in the model. If default is allowed, however, the optimal contract depends upon the level of bankruptcy protection in the economy, which is described by a minimum level of wage income. We show that there is an optimal intermediate range of bankruptcy protection. Within this range, allowing default increases efficiency in the economy relative to the case of no default. Also, the model predicts specific levels of consumer debt, interest and default rates as function of the level of bankruptcy protection level.
Author: Borys Grochulski
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be good news for the agent. In particular, under weak conditions, the optimal contract has exactly two regions. If the agent's continuation value is below a threshold, the agent's continuation value experiences a negative jump upon arrival of the job-destruction shock. If the agent's value is above this threshold, however, the jump in the agent's continuation value is positive, i.e., the agent gets rewarded when the match becomes unproductive. This pattern of adjustment of the agent's value at job destruction allows the firm to reduce the costs of effort incentives while the match is productive. In particular, it allows the firm to adjust the drift of the agent's continuation value process so as to decrease the risk of reaching either of the two inefficient agent retirement points. Further, we study the sensitivity of the optimal contract to the arrival rate of job destruction.
Author: Pegaret Pichler
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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The optimal organizational form and optimal incentive contract are characterized for a team of money managers, assuming that the investor (principal) is risk averse and that each manager's (agent's) actions affect both that manager's expected return and the correlation of returns between managers. If the managers are risk tolerant, then a noncooperative team organization and a contract in which each manager is rewarded both for doing well and for doing better than the team, is the most efficient way to encourage managers to exert effort in diversified activities. This is despite the fact that, in such a contract total wages paid are a concave function of total returns, and so using the contract to encourage diversification (and thus achieve lower risk) is in direct conflict with the investor's objective of using the contract to transfer risk onto the managers. As the risk aversion of both the investor and the managers increases, cooperation among managers becomes the optimal way to organize the team. For some parameter values, if everyone is risk averse, a benchmark outcome (the same as first best, but with limited liability) can be achieved. The benchmark outcome with diversification of efforts can never be achieved if the managers are risk tolerant, or if cooperation is infeasible.
Author: George P. Baker
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Objective measures of performance are seldom perfect. In response, incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. Naturally, objective and subjective measures often are substitutes, sometimes strikingly so: we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible (because the firm's fallback position after reneging on an implicit contact is too attractive). We also show, however, that objective and subjective measures can reinforce each other: if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures (because the improved objective measures increase the value of the ongoing relationship, and so reduce the firm's incentive to renege). We also analyze the use of subjective weights on objective performance measures, and provide case-study evidence consistent with our analyses.
Author: Florian Englmaier
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: George Baker
Publisher:
ISBN:
Category :
Languages : es
Pages : 37
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Author: Milind Dawande
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Motivated by the ever-growing complexity of projects and the consistent trend of outsourcing of individual tasks or components, we study the contract-design problem faced by a firm (or organization) for executing a project consisting of multiple tasks, each of which is performed by an individual contractor whose efforts (work-rates) are not observable. While the contractors incur costs continuously during the course of their tasks, the firm realizes its reward or revenue only when the entire project is (i.e., all tasks are) completed. The firm's contract-design decisions and the contractors' effort-level decisions are all governed by the goals of maximizing the respective party's expected discounted profit. We adopt the framework in Kwon et al. (2010a) and Chen et al. (2015), and derive optimal contracts for both parallel projects (tasks can be performed in parallel) and sequential projects (tasks have to be performed sequentially). The simplicity of the contracts we obtain suggests that there is potential for designing profit-maximizing contracts without paying a price in terms of contract complexity.
Author: Florian Englmaier
Publisher:
ISBN:
Category : Contracts
Languages : en
Pages : 0
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Author: Pierre Chaigneau
Publisher:
ISBN:
Category : Incentives in industry
Languages : en
Pages : 35
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