Using Cost Observation To Regulate A Manager Who Has A Preference For Empire‐Building
AbstractWe study regulation of a manager who has a preference for empire-building (high output), in the presence of moral hazard (unobservable effort) and adverse selection (unobservable productivity). We find that the optimal contract is linear in cost, being composed by a fixed payment plus a partial cost reimbursement. The preference for higher output reduces the manager's tendency to announce that his or her productivity is low, allowing a more powered incentive scheme (a lower fraction of the cost is reimbursed), which alleviates the problem of moral hazard.
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Bibliographic InfoArticle provided by University of Manchester in its journal The Manchester School.
Volume (Year): 79 (2011)
Issue (Month): 1 (January)
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- Ana P. Borges & Didier Laussel & João Correia-da-Silva, 2013.
"Multidimensional screening with complementary activities: regulating a monopolist with unknown cost and unknown preference for empire-building,"
FEP Working Papers
486, Universidade do Porto, Faculdade de Economia do Porto.
- Ana Pinto Borges & Didier Laussel & João Correia-da-Silva, 2013. "Multidimensional Screening with Complementary Activities: Regulating a Monopolist with Unknown Cost and Unknown Preference for Empire Building," Games, MDPI, Open Access Journal, vol. 4(3), pages 532-560, September.
- Ana Borges & João Correia-da-Silva & Didier Laussel, 2014. "Regulating a manager whose empire-building preferences are private information," Journal of Economics, Springer, vol. 111(2), pages 105-130, March.
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