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Optimal incentives and the time dimension of performance measurement

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  • Raith, Michael

Abstract

I study optimal incentive contracting in a two-period model in which an agentʼs action generates an output with delay, and a noisy signal of output early. Under very general conditions, the optimal contract depends on the early signal as well as on output even if the signal is uninformative of effort, given output, and even if the agent has access to credit. An important characteristic of any performance measure, therefore, is the time at which it is generated. The results shed light on the use of forward-looking performance measures such as stock returns or earnings with accruals for accounts receivable.

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  • Raith, Michael, 2012. "Optimal incentives and the time dimension of performance measurement," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2158-2189.
    • Handle: RePEc:eee:jetheo:v:147:y:2012:i:6:p:2158-2189
    DOI: 10.1016/j.jet.2012.09.010
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    Cited by:

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    2. Qintao Fan & Wei Li, 2018. "Leading indicator variables and managerial incentives in a dynamic agency setting," Review of Accounting Studies, Springer, vol. 23(4), pages 1715-1753, December.

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    More about this item

    Keywords

    Optimal incentives; Performance measurement; Intertemporal consumption; Informativeness; Timeliness;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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