I explicitly derive the optimal dynamic incentive contract in a general continuous-time agency problem where inducing static first-best action is not always optimal. My framework generates two dynamic contracts new to the literature: (1) a “quiet-life” arrangement and (2) a suspension-based endogenously renegotiating contract. Both contractual forms induce a mixture of first-best and non-first-...

Over the past decade, academic research has identifi ed a number of replication strategies capable of capturing between 40% to 80% of the average return of many popular hedge fund strategies. Investors are beginning to take notice of these replication strategies, especially because of their rule based, transparent features and the fact that they can be executed at low cost. Armed with this alte...

Principals seek to enter a productive relationship with agents by posting general incentive contracts. A contract is exclusive and must solve both the ex post moral hazard and the ex ante competitive search problem (participation). Menus of contracts do not help hence (single) contract posting is optimal. Principal competition restores some bargaining power with the agents, to whom principals m...

Managerial Hedging and Incentive Compensation in Stock Market Economies Incentive compensation exposes managers to the risk of their firms. Managers can hedge their aggregate risk exposure by trading in financial markets, but cannot hedge their firmspecific exposure. This gives them an incentive to pass up firm-specific projects in favor of standard projects that contain greater aggregate risk....

Introducing concerns about land fertility for landlords in a Principal –Agent model of sharecropping with moral hazard, we show that the optimal contract under limited commitment reflects a trade-off between production and land quality maintenance. Using data from the Philippines, a model where the leasing out and contract choices are simultaneous is estimated and avoids the selectivity bias of...

Information systems outsourcing is now almost standard practice for many companies. Outsourcing the information processing activities is a complex issue that entails considerable implications for the strategy of the firm. An important mechanism for managing the performance of outsourcing vendors is incentive contracts. But to develop an outsourcing contract the IS manager must quantify risks an...

This paper studies the incentive effects of a balanced scorecard within a multitask agency framework under both formal and relational contracts. First, the main characteristics of the balanced scorecard are analyzed with respect to performance measure congruity. It is shown that under complete verifiability, a properly designed balanced scorecard is capable of perfectly aligning the interests o...

Abstract We experimentally investigate the relevance of a cash upfront payment for effort-enhancing effect penalty contracts. find that contracts where participants receive physically before working on real effort task induce more than are only informed about payment. When comparing with economically-equivalent bonus contracts, we lead to higher provision but if in advance. suggest salience mig...

We present a tractable, static, general equilibrium model with multiple sectors in which firms offer workers incentive contracts and simultaneously raise capital in stock markets. Workers optimally invest in the stock market and at the same time hedge labor income risk. Firms rationally take agents’ portfolio decisions into account. In equilibrium, the cost of capital of each sector is endogeno...