Does improved information improve incentives?

Chaigneau, Pierre, Edmans, Alex and Gottlieb, Daniel ORCID: 0000-0002-0555-6185 (2018) Does improved information improve incentives? Journal of Financial Economics, 130 (2). 291 - 307. ISSN 0304-405X

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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.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-f...
Additional Information:	© 2018 Elsevier B.V.
Divisions:	Management
Subjects:	H Social Sciences > HG Finance H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods
Date Deposited:	26 Oct 2019 11:54
Last Modified:	27 Mar 2024 05:00
URI:	http://eprints.lse.ac.uk/id/eprint/102227

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