Only time will tell - A Theory of deferred compensantion
Event details
| Date | 16.09.2016 |
| Hour | 10:30 › 12:00 |
| Speaker | Marcus OPP (UC Berkeley, Haas School of Business) |
| Location | |
| Category | Conferences - Seminars |
We characterize optimal contract design in settings where the principal observes informative signals about the agent's initial action over time. Under bilateral risk-neutrality and limited liability of the agent, all relevant features of a signal process can be encoded in a single “informativeness” function. This function is increasing in time and fully captures the notion of ``only time will tell.'' We then show how the principal uses the timing dimension of the compensation contract to extract rents from the agent via the use of more informative performance signals. Optimal contracts trade off the rent-extraction benefit of deferral with the associated costs resulting from the agent's relative impatience. Our framework lends itself to evaluate the effects of recent regulatory proposals in the financial sector mandating the deferral of bonus payments and the use of claw-back clauses.
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