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Author: Qi Liu Publisher: ISBN: Category : Languages : en Pages : 34
Book Description
This paper studies a principal-agent model in which the information on future firm performance is ambiguous and the agent is averse to ambiguity. We show that if firm risk is ambiguous, while stocks always induce the agent to perceive a high risk, options can induce him to perceive a low risk. As a result, options can be less costly in incentivizing the agent than stocks in the presence of ambiguity. In addition, we show that providing the agent with more incentives would induce the agent to perceive a higher risk, and there is a discontinuous jump in the compensation cost as incentives increase, which makes the principal reluctant to reset contracts frequently when underlying fundamentals change. Thus, compensation contracts exhibit an inertia property. Lastly, the model sheds some light on the use of relative performance evaluation, and provides a rationale for the puzzle of pay-for-luck in the presence of ambiguity.
Author: Qi Liu Publisher: ISBN: Category : Languages : en Pages : 34
Book Description
This paper studies a principal-agent model in which the information on future firm performance is ambiguous and the agent is averse to ambiguity. We show that if firm risk is ambiguous, while stocks always induce the agent to perceive a high risk, options can induce him to perceive a low risk. As a result, options can be less costly in incentivizing the agent than stocks in the presence of ambiguity. In addition, we show that providing the agent with more incentives would induce the agent to perceive a higher risk, and there is a discontinuous jump in the compensation cost as incentives increase, which makes the principal reluctant to reset contracts frequently when underlying fundamentals change. Thus, compensation contracts exhibit an inertia property. Lastly, the model sheds some light on the use of relative performance evaluation, and provides a rationale for the puzzle of pay-for-luck in the presence of ambiguity.
Author: Svenja C. Sommer Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
Many novel projects are characterized by ambiguity (impossibility to recognize all influence variables and to foresee all possible events) and complexity (interaction of many performance influence variables, making the overall performance difficult to estimate). Two fundamental approaches to project management under these conditions have been identified: Selectionism, or pursuing multiple approaches independently of one another and picking the best one ex post, and trial & error learning, or flexibly adjusting to new information about the environment as it emerges. While the actions to be taken under the selectionist approach can be defined at the outset, and thus standard contracting theory applies, trial & error learning involves taking actions after ambiguity has been resolved, making it inherently difficult to set incentives for managers. Actions and targets cannot be specified at the outset, since they would no longer be optimal at the time the actions should be executed. In a search model in a complex performance landscape, this paper first shows that trial & error learning is more attractive than selectionism when ambiguity and high complexity combine. Second, for this situation of trial & error learning, we construct incomplete contracts between a principal (e.g., the firm) and an agent (e.g., a project manager) that can re-instate optimal incentives for the agent. This is achieved by a priori defining time points and aspects of re-negotiation, depending on what each party learns. As the project manager, as an employee, is ambiguity averse, he must be protected from unforeseeable variations in his compensation. The principal, in contrast, is willing to accept ambiguity, and the incomplete contract offers him a means to optimally re-direct the agent's actions in return or insuring the agent against payment ambiguity.
Author: Martin Szydlowski Publisher: ISBN: Category : Languages : en Pages :
Book Description
I study a dynamic principal agent model in which the effort cost of the agent is unknown to the principal. The principal is ambiguity averse, and designs a contract which is robust to the worst case effort cost process. Ambiguity divides the contract into two regions. After sufficiently high performance, the agent reaches the over-compensation region, where he receives excessive benefits compared to the contract without ambiguity, while after low performance, he enters the under-compensation region. Ambiguity also causes a disconnect between the current effort cost and the strength of incentives. That is, even when the agent is under-compensated, his incentives are as strong as in the over-compensation region, since the principal fears the agent might shirk otherwise. Under ambiguity, the agent's true effort cost does not need to equal the worst-case. analyze the agent's incentives for this case, and show that the possibility of firing is detrimental to the agent's incentives. I study several extensions concerning the timing structure and the nature of the principal's ambiguity aversion. -- Dynamic contract ; principal-agent model ; ambiguity aversion ; continuous time
Author: Itzhak Gilboa Publisher: Routledge ISBN: 1134344155 Category : Business & Economics Languages : en Pages : 584
Book Description
This volume brings together important papers, coupled with new introductions, in the massively influential area of uncertainty in economic theory. Seminal papers are available together for the first time in book format, with new introductions and under the steely editorship of Itzhak Gilboa - this book is a useful reference tool for economists all over the globe.
Author: Quentin Couanau Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
This thesis focuses on the consequences of ambiguity aversion in dynamic contexts in economics. In particular, we focus on the consequences of ambiguity aversion in irreversible investment problems, and in dynamic moral hazard problems in continuous-time. The first chapter reviews the literature on ambiguity in dynamic contexts, and reviews existing models as well as their applications in economics and finance. The second chapter deals with irreversible investment in the monopoly case and under perfect competition, under ambiguous volatility. The notion of ambiguous volatility requires the use of recent tools in non linear expectation theory. We show that the optimal entry strategy of a monopoly under ambiguous volatility implies investing sooner than the perfectly competitive equilibrium under volatility ambiguity. The third chapter builds on the results of the second chapter and treats a special case of imperfect competition. The last chapter deals with a dynamic principal-agent problem under moral in continuous-time, in which agents perceive ambiguity about the drift of the relevant process. We show that under certain conditions, the optimal contract is linear in final output. We then use this result to discuss the effect of ambiguity aversion on the incentive power of the optimal contract and the informativeness principle.
Author: Alex Edmans Publisher: ISBN: Category : Languages : en Pages : 46
Book Description
This paper identifies a broad class of situations in which the contract is both attainable in closed form and detail-neutral. The contract's functional form is independent of the noise distribution and reservation utility; moreover, when the cost of effort is pecuniary, the contract is linear in output regardless of the agent's utility function. Our contract holds in both continuous time and a discrete-time, multi-period setting where action follows noise in each period. The tractable contracts of Holmstrom and Milgrom (1987) can thus be achieved in settings that do not require exponential utility, Gaussian noise or continuous time. Our results also suggest that incentive schemes need not depend on complex details of the particular setting, a number of which (e.g. agent's risk aversion) are difficult for the principal to observe.The proof techniques use the notion of relative dispersion and subdifferentials to avoid relying on the first-order approach, and may be of methodological interest.
Author: Qi Liu
Author: Qi Liu
Author: Svenja C. Sommer
Author: Martin Szydlowski
Author: George Joseph Feeney
Author: Christoph Loch
Author: Itzhak Gilboa
Author: Quentin Couanau
Author: Alex Edmans
Author: Florian Englmaier
Author: Luciano De Castro