scholarly journals You Don’t Always Get What You Pay For: Bonuses, Perceived Income and Effort

2011 ◽  
Vol 12 (1) ◽  
pp. 1-10 ◽  
Author(s):  
Wendelin Schnedler
Keyword(s):  
Hazard Rate ◽  
Success Probability ◽  
Income Effect ◽  
Principal Agent ◽  
Marginal Effect ◽  
Optimal Contract ◽  
Incentive Effect ◽  
Probability Of Success ◽  
Practical Implications ◽  
Principal Agent Relationship

Abstract Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. This paper provides conditions such that no success bonus induces the agent to exert more effort and the optimal contract is independent of success. Moreover, success bonuses may even reduce effort and thus the probability of success. The reason is that bonuses increase the perceived income of the agent and can hence reduce his willingness to exert effort. This perceived income effect has to be weighed against the incentive effect of the bonus. The tradeoff is determined by the marginal effect of effort on the success probability in relation to this probability itself (success hazard-rate of effort). The paper also discusses practical implications of the finding.

scholarly journals Endogenous Verifiability and Relational Contracting

2009 ◽  
Vol 99 (5) ◽  
pp. 2193-2208 ◽  
Author(s):  
Ola Kvaløy ◽  
Trond E. Olsen
Keyword(s):  
Principal Agent ◽  
Relational Contracting ◽  
Strong Assumption ◽  
Repeated Interaction ◽  
Ex Ante ◽  
Contractual Incompleteness ◽  
The Relationship ◽  
Principal Agent Relationship

Principal-agent models usually invoke the strong assumption that the parties know for sure ex ante whether a variable is verifiable or not. This paper assumes that only the probability of verification is known, and that this probability is endogenously determined. We analyze a principal-agent relationship where the verifiability of the agent's output is determined by the principal's investment in drafting an explicit contract. The model is well suited for analyzing the relationship between explicit contracting, legal courts, trust, and relational contracting. In particular, we show how trust—established through repeated interaction—and legal courts may induce contractual incompleteness. (JEL D82, D86)

Stock and Option Proportions in Executive Compensation

2011 ◽  
Vol 01 (01) ◽  
pp. 169-203 ◽  
Author(s):  
Phelim P. Boyle ◽  
Ranjini Jha ◽  
Shannon Kennedy ◽  
Weidong Tian
Keyword(s):  
Executive Compensation ◽  
Empirical Evidence ◽  
Risk Taking ◽  
Principal Agent ◽  
Optimal Contract ◽  
Efficient Mechanism ◽  
Opposite Conclusion

There is controversy about the relative merits of stock and options in executive compensation. Some observers contend that stock is a more efficient mechanism, while others reach the opposite conclusion. We focus on the manager's risk-taking incentives and derive an optimal compensation contract by using the concept of a comparable benchmark and imposing a volatility constraint in a principal-agent framework. We demonstrate a joint role for both stock and options in the optimal contract. We show that firms with higher volatility should use more options in compensating their executives and provide empirical evidence supporting this testable implication.

scholarly journals Robustness Computation of Dynamic Controllability in Probabilistic Temporal Networks with Ordinary Distributions

2020 ◽  
Author(s):  
Michael Saint-Guillain ◽  
Tiago Stegun Vaquero ◽  
Jagriti Agrawal ◽  
Steve Chien
Keyword(s):  
Probability Distributions ◽  
Dynamic Control ◽  
Success Probability ◽  
Polynomial Time Algorithm ◽  
Time Algorithm ◽  
Temporal Networks ◽  
Fixed Parameter ◽  
Probability Of Success ◽  
Dynamic Policy ◽  
Simple Temporal Networks

Most existing works in Probabilistic Simple Temporal Networks (PSTNs) base their frameworks on well-defined probability distributions. This paper addresses on PSTN Dynamic Controllability (DC) robustness measure, i.e. the execution success probability of a network under dynamic control. We consider PSTNs where the probability distributions of the contingent edges are ordinary distributed (e.g. non-parametric, non-symmetric). We introduce the concepts of dispatching protocol (DP) as well as DP-robustness, the probability of success under a predefined dynamic policy. We propose a fixed-parameter pseudo-polynomial time algorithm to compute the exact DP-robustness of any PSTN under NextFirst protocol, and apply to various PSTN datasets, including the real case of planetary exploration in the context of the Mars 2020 rover, and propose an original structural analysis.

scholarly journals Experimental tests for gender effects in a principal-agent game

2019 ◽  
Vol 2 (1) ◽  
Author(s):  
Andrew B Whitford ◽  
Holona L Ochs
Keyword(s):  
Laboratory Test ◽  
Experimental Tests ◽  
Gender Effects ◽  
Principal Agent ◽  
Wage Labor ◽  
Optimal Contract ◽  
Men And Women ◽  
Perceived Trust ◽  
Labor Agreement ◽  
Bargaining Position

Traditional arguments against women as leaders suggest that women would not be extended the trust necessary for leadership and/or that women undermine their own bargaining position by extending too much trust to others. We examine data from a laboratory test in which pairs of subjects are given the task of negotiating a wage-labor agreement.  We first derive the optimal contract offer for principals and response by agents. We find that men and women do not reach different bargaining outcomes. We also find that women in authority are perceived as more trustworthy than men with authority, and women are no more or less trusting than men of their superiors or subordinates. The perceived trust is not rooted in differential wage terms but is based on the negotiation setting. Thus, women are likely to be extended the trust necessary to lead and are not likely to produce outcomes that are significantly different from men.

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