Open AccessPosted Content
The Tenuous Tradeoff Between Risk and Incentives
Reads0
Chats0
TLDR
In this article, the authors argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees, and they argue that parts of the existing empirical literature are better explained through this lens than with the standard model.Abstract:
Empirical work testing for a negative tradeoff between risk and incentives, a cornerstone of agency theory, has not had much success. Indeed, the data seem to suggest a positive relationship between measures of uncertainty and incentives, rather than the posited negative tradeoff. I argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees. When workers operate in certain settings, the activities that they should engage in are well known, and firms are content to assign tasks to workers and monitor their inputs. By contrast, when the situation is more uncertain, firms know less about how workers should be spending their time. As a result, the delegate responsibility to workers but, to constraint heir discretion, base compensation on observed output. Hence, uncertainty and output-based pay are positively related. I argue that parts of the existing empirical literature are better explained through this lens than with the standard model.read more
Citations
More filters
The Optimal Design of Stock Options: A Loss-aversion Approach
Ernst Maug,Oliver G. Spalt +1 more
TL;DR: In this paper, a principal agent-model with loss aversion was used to calibrate the model to a cross-section of US CEOs and found that for the majority of CEOs options with strike prices close to the current stock price would be optimal and the ine¢ ciency of observed contracts compared to those prescribed by the model is small.
Journal ArticleDOI
Do White-Collar Employee Incentives Improve Firm Profitability?
TL;DR: In this paper, the authors examined the relationship between performance-based incentives for WCEs and the future profitability of the firm as well as to determine whether this association is moderated by task complexity.
Journal ArticleDOI
Are CEOS Paid Extra for Riskier Pay Packages
TL;DR: The authors quantifies the cost of CEO incentive compensation by estimating an elasticity of pay to the variance of pay, which is based on the benchmark moral hazard model widely used to study CEO pay.
Journal ArticleDOI
The impatient salesperson and the delegation of pricing authority
TL;DR: In this paper, it was shown that sales agents prefer a lower price than does an owner and are therefore reluctant to delegate pricing authority to sales agents even when the agents have superior market information.
Journal ArticleDOI
Supervisor Influence on Employee Financial Misconduct
TL;DR: In this article, the influence of supervisors on financial misconduct at branches of broker-dealer firms was studied, finding that individual supervisor fixed effects explain twice as much variation in branch misconduct as firm fixed effects.
References
More filters
Journal ArticleDOI
Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design
Bengt Holmstrom,Paul Milgrom +1 more
TL;DR: In this article, a principal-agent model that can explain why employment is sometimes superior to independent contracting even when there are no productive advantages to specific physical or human capital and no financial market imperfections to limit the agent's borrowings is presented.
Journal ArticleDOI
The Provision of Incentives in Firms
TL;DR: In this article, a review of existing work on the provision of incentives for workers is presented, and the authors evaluate this literature in the light of a growing empirical literature on compensation from two perspectives: first, an underlying assumption of this literature is that individuals respond to contracts that reward performance.
Journal ArticleDOI
Formal and Real Authority in Organizations
Philippe Aghion,Jean Tirole +1 more
TL;DR: In this article, the authors developed a theory of the allocation of formal authority and real authority within organizations, and illustrated how a formally integrated structure can accommodate various degrees of "real" integration.
Book ChapterDOI
An analysis of the principal-agent problem
TL;DR: In this article, the authors show that the optimal way of implementing an action by an agent can be found by solving a convex programming problem, and they use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.
Journal ArticleDOI
The Use of Equity Grants to Manage Optimal Equity Incentive Levels
John E. Core,Wayne R. Guay +1 more
TL;DR: In this article, the authors predict that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives, and use the residuals from this model to measure deviations between CEOs’ holdings of equity incentive and optimal levels.
Related Papers (5)
Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design
Bengt Holmstrom,Paul Milgrom +1 more