Results 1  10
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22
Structural models and endogeneity in corporate finance, Working Paper
, 2002
"... First, this paper specifies a structural model of the firm, the standard principalagent model augmented with an investment decision, and then uses that model to conduct empirical work on the connection between performance and ownership. We calibrate the model exactly to data on managerial ownership ..."
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Cited by 29 (0 self)
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First, this paper specifies a structural model of the firm, the standard principalagent model augmented with an investment decision, and then uses that model to conduct empirical work on the connection between performance and ownership. We calibrate the model exactly to data on managerial ownership and the level of investment in productive assets from Execucomp and Compustat. For each firmyear observation, this generates estimates of structural productivity parameters for both investment and managerial input. Based on variation in these exogenous parameters, we find that Tobin’s Q and managerial ownership exhibit the patterns documented in McConnell and Servaes (1990). Thus, our augmented principalagent model can explain the humpshaped empirical relation between performance and managerial ownership. No additional factors, such as managerial entrenchment overtaking incentive alignment at high ownership levels, are required. Second, the calibration creates a data panel for which we know the underlying structural model and appropriate empirical specification. This allows us to quantify the statistical and economic importance of specification error and endogeneity in empirical work. Including firm fixed effects or controls for firm size (investment or sales) adds explanatory power, but the spurious relation between Q and managerial ownership typically remains. In this setting, standard approaches to the
Fairness and incentives in a multitask principalagent model
 SCANDINAVIAN JOURNAL OF ECONOMICS
, 2004
"... This paper reports on a twotask principal–agent experiment in which only one task is contractible. The principal can either offer a piecerate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piecerate contracts. Many principals reward high effort on both tasks wit ..."
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Cited by 27 (5 self)
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This paper reports on a twotask principal–agent experiment in which only one task is contractible. The principal can either offer a piecerate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piecerate contracts. Many principals reward high effort on both tasks with substantial bonuses. Agents anticipate this and provide high effort on both tasks. In contrast, almost all agents with a piecerate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the selfinterest theory but is consistent with theories of fairness.
On Dynamic PrincipalAgent Problems in Continuous Time
, 2009
"... I study the provision of incentives in dynamic moral hazard models with hidden actions and possibly hidden states. I characterize implementable contracts by establishing the applicability of the firstorder approach to contracting. Implementable contracts are history dependent, but can be written re ..."
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Cited by 13 (0 self)
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I study the provision of incentives in dynamic moral hazard models with hidden actions and possibly hidden states. I characterize implementable contracts by establishing the applicability of the firstorder approach to contracting. Implementable contracts are history dependent, but can be written recursively with a small number of state variables. When the agent’s actions are hidden, but all states are observed, implementable contracts must take account of the agent’s utility process. When the agent has access to states which the principal cannot observe, implementable contracts must also take account of the shadow value (in marginal utility terms) of the hidden states. As an application of my results, I explicitly solve a model with linear production and exponential utility, showing how allocations are distorted for incentive reasons, and how access to hidden savings further alters allocations.
Asymptotic efficiency in dynamic principalagent problems
 Journal of Economic Theory
, 2000
"... In a seminal paper, B. R. Holmstrom and P. R. Milgrom (1987, Econometrica 55, 303 328) examine a principalagent model in which the agent continuously controls the drift rate of a Brownian motion. Given a stationary environment, they show that the optimal sharing rule is a linear function of aggrega ..."
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Cited by 7 (0 self)
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In a seminal paper, B. R. Holmstrom and P. R. Milgrom (1987, Econometrica 55, 303 328) examine a principalagent model in which the agent continuously controls the drift rate of a Brownian motion. Given a stationary environment, they show that the optimal sharing rule is a linear function of aggregated output. This paper considers a variant of the Brownian model in which control revisions take place in discrete time. It is shown that no matter how ``close' ' discrete time is to continuous time, the firstbest solution can be approximated arbitrarily closely with a random spot check and a suitably chosen sequence of step functions. Journal of Economic
2007a): “Continuous time limits of repeated games with imperfect public monitoring,” Review of Economic Dynamics
"... Abstract: In a repeated game with imperfect public information, the set of equilibria depends on the way that the distribution of public signals varies with the players ’ actions. Recent research has focused on the case of “frequent monitoring, ” where the time interval between periods becomes small ..."
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Cited by 7 (4 self)
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Abstract: In a repeated game with imperfect public information, the set of equilibria depends on the way that the distribution of public signals varies with the players ’ actions. Recent research has focused on the case of “frequent monitoring, ” where the time interval between periods becomes small. Here we study a simple example of a commitment game with a longrun and shortrun player in order to examine different specifications of how the signal distribution depends upon period length. We give a simple criterion for the existence of efficient equilibrium, and show that the efficiency of the equilibria that can be supported depends in an important way on the effect of the player’s actions on the variance of the signals, and whether extreme values of the signals are “bad news ” of “cheating ” behavior, or “good news ” of “cooperative ” behavior. 1 Financial support from NSF grants SES031471 and SES0426199 is gratefully acknowledged. We would like to thank Eduardo Faingold, Yuliy Sannikov, and Andrzej Skrzypacz for helpful conversations, and Satoru Takahashi for careful proofreading. 2 Departments of Economics, Harvard University, and Washington University in St. Louis. 1
Tractability in Incentive Contracting
, 2010
"... This paper identifies a class of multiperiod agency problems in which the optimal contract is tractable (attainable in closed form). By modeling the noise before the action in each period, we force the contract to provide correct incentives statebystate, rather than merely on average. This tightly ..."
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Cited by 6 (3 self)
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This paper identifies a class of multiperiod agency problems in which the optimal contract is tractable (attainable in closed form). By modeling the noise before the action in each period, we force the contract to provide correct incentives statebystate, rather than merely on average. This tightly constrains the set of admissible contracts and allows for a simple solution to the contracting problem. Our results continue to hold in continuous time, where noise and actions are simultaneous. We thus extend the tractable contracts of Holmstrom and Milgrom (1987) to settings that do not require exponential utility, a pecuniary cost of effort, Gaussian noise or continuous time. The contract’s functional form is independent of the noise distribution. Moreover, if the cost of effort is pecuniary (multiplicative), the contract is linear (loglinear) in output and its slope is independent of the noise distribution, utility function and reservation utility.
Optimal RiskSharing with Effort and Project
 Choice”, Journal of Economic Theory
"... We consider firstbest risksharing problems in which “the agent ” can control both the drift (effort choice) and the volatility of the underlying process (project selection). In a model of delegated portfolio management, it is optimal to compensate the manager with an optiontype payoff, where the ..."
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Cited by 6 (1 self)
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We consider firstbest risksharing problems in which “the agent ” can control both the drift (effort choice) and the volatility of the underlying process (project selection). In a model of delegated portfolio management, it is optimal to compensate the manager with an optiontype payoff, where the functional form of the option is obtained as a solution to an ordinary differential equation. In the general case, the optimal contract is a fixed point of a functional that connects the agent’s and the principal’s maximization problems. We apply martingale/duality methods familiar from optimal consumptioninvestment problems.
Optimal Compensation with Hidden Action and LumpSum Payment in a ContinuousTime Model
 Applied Mathematics and Optimization
, 2009
"... We consider a problem of finding optimal contracts in continuous time, when the agent’s actions are unobservable by the principal, who pays the agent with a onetime payoff at the end of the contract. We fully solve the case of quadratic cost and separable utility, for general utility functions. The ..."
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Cited by 4 (3 self)
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We consider a problem of finding optimal contracts in continuous time, when the agent’s actions are unobservable by the principal, who pays the agent with a onetime payoff at the end of the contract. We fully solve the case of quadratic cost and separable utility, for general utility functions. The optimal contract is, in general, a nonlinear function of the final outcome only, while in the previously solved cases, for exponential and linear utility functions, the optimal contract is linear in the final output value. In a specific example we compute, the firstbest principal’s utility is infinite, while it becomes finite with hidden actions, which is increasing in value of the output. In the second part of the paper we formulate a general mathematical theory for the problem. We apply the stochastic maximum principle to give necessary conditions for optimal contracts. Sufficient conditions are hard to establish, but we suggest a way to check sufficiency using nonconvex optimization.
Calibrated Incentive Contracts
, 2011
"... This paper studies a dynamic agency problem which includes limited liability, moral hazard and adverse selection. The paper develops a robust approach to dynamic contracting based on calibrating the payoffs that would have been delivered by simple benchmark contracts that are attractive but infeasib ..."
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Cited by 4 (0 self)
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This paper studies a dynamic agency problem which includes limited liability, moral hazard and adverse selection. The paper develops a robust approach to dynamic contracting based on calibrating the payoffs that would have been delivered by simple benchmark contracts that are attractive but infeasible, due to limited liability constraints. The resulting dynamic contracts are detailfree and satisfy robust performance bounds independently of the underlying process for returns, which need not be i.i.d. or even ergodic. 1
Repeated Games with Frequent Signals
 Quarterly Journal of Economics
, 2009
"... Abstract: We study repeated games with frequent actions and frequent imperfect public signals, where the signals are the aggregate of many discrete events, such as sales or tasks. The highfrequency limit of the equilibrium set depends on both the probability law governing the discrete events and on ..."
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Cited by 2 (0 self)
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Abstract: We study repeated games with frequent actions and frequent imperfect public signals, where the signals are the aggregate of many discrete events, such as sales or tasks. The highfrequency limit of the equilibrium set depends on both the probability law governing the discrete events and on how many events are aggregated into a single signal. When the underlying events have a binomial distribution, the limit equilibria correspond to the equilibria of the associated continuoustime game with diffusion signals, but other event processes that aggregate to a diffusion limit can have a different set of limit equilibria. Thus the continuoustime game need not be a good approximation of the highfrequency limit whenever the underlying events have three or more possible values. 1 We thank Ed Glaeser and two referees for useful comments, and Mihai Manea for careful proofreading. NSF grants, SES0426199 and SES 0646816 provided financial assistance. 1 1.