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on Contract Theory and Applications |
| By: | Vasama, Suvi |
| Abstract: | I examine optimal managerial compensation and turnover policy in a principal-agent model in which the firm output is serially correlated over time. The model captures a learning-by-doing feature: higher effort by the manager increases the quality of the match between the firm and the manager in the future. The optimal incentive scheme entails an inefficiently high turnover rate in the early stages of the employment relationship. The optimal turnover probability depends on the past performance and the likelihood of turnover decreases gradually with superior performance. Following weak performance, the contract implements a permanently inefficient turnover rate. With correlated outcome, a permanent inefficiency is needed to save on information rents to the agent, even when the agent does not have persistent private information. |
| JEL: | C73 D82 D86 |
| Date: | 2017–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_014&r=cta |
| By: | Vasama, Suvi |
| Abstract: | I examine a simple model of dynamic moral hazard in which the agent has persistent private information. I show that despite the complexity of the framework, the problem has a simple solution that can be found using standard methods. The incentives at the optimal contract can be captured using two state variables: the agent's continuation value and his information rent. The optimal contract uses a combination of nonnegative payments and inefficient liquidation threat to provide the agent incentives. In the beginning, the inefficient liquidation threat is severe, but the expected length of the relationship long, such that the agent's information rent is high. Over time, the information rent decays and continuation value increases as function of the past outcomes. Depending on the past performance, these two processes meet and liquidation at a fixed threshold becomes optimal. In particular, early weak performance leads to a permanent distortion that cannot be undone by performing well in the future. |
| JEL: | D82 D86 |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_015&r=cta |
| By: | Lach, Saul; Neeman, Zvika; Schankerman, Mark |
| Abstract: | We study the design of a government loan program for risky R&D projects that generate positive externalities, undertaken by entrepreneurs in a competitive capital market environment. With adverse selection, the optimal contract requires a high interest rate but nearly zero co-financing by the entrepreneur. This contrasts sharply with observed policies, typified by a low interest rate and high co-finanacing requirement. When we add moral hazard (endogenous success), the optimal policy consists of a menu of at most two contracts, one with high interest/zero self-finanacing and a second with a lower interest but also a co-finanacing requirement. Calibrated simulations compare the optimal policy and observed program designs in terms of innovation and welfare. |
| Keywords: | additionality; entrepreneurship; government nance; innovation; mechanism design; R&D; start-ups |
| JEL: | D61 D82 O32 O38 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12199&r=cta |