Does improved information improve incentives?
Journal
Journal of Financial Economics
Subject
Finance
Publishing details
Authors / Editors
Chaigneau P;Edmans A;Gottlieb D
Biographies
Publication Year
2018
Abstract
This paper studies the value of more precise signals on agent performance in an optimal contracting model with endogenous effort. With limited liability, the agent’s wage is increasing in output only if output exceeds a threshold, else it is zero regardless of output. If the threshold is sufficiently high, the agent only beats it, and is rewarded for increasing output through greater effort, if there is a high noise realization. Thus, a fall in output volatility reduces effort incentives – information and effort are substitutes – offsetting the standard effect that improved information lowers the cost of compensation. We derive conditions relating the incentive effect to the underlying parameters of the agency problem.
Keywords
Executive compensation; limited liability; Options; Risk management; Relative performance evaluation
Available on ECCH
No