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Using Cost Observation To Regulate A Manager Who Has A Preference For Empire‐Building

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  • ANA PINTO BORGES
  • JOÃO CORREIA‐DA‐SILVA

Abstract

We 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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File URL: http://hdl.handle.net/10.1111/j.1467-9957.2010.02224.x
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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 79 (2011)
Issue (Month): 1 (January)
Pages: 29-44

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Handle: RePEc:bla:manchs:v:79:y:2011:i:1:p:29-44

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Cited by:
  1. 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.
  2. 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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