Uncertainty, risk, and incentives: theory and evidence
AbstractUncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off, this "learning-by-doing" effect generates a positive relation between profitability uncertainty and incentives. We document empirical support for this prediction.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-18.
Date of creation: 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-06 (All new papers)
- NEP-CBE-2013-04-06 (Cognitive & Behavioural Economics)
- NEP-CTA-2013-04-06 (Contract Theory & Applications)
- NEP-HRM-2013-04-06 (Human Capital & Human Resource Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bo Becker, 2006. "Wealth and Executive Compensation," Journal of Finance, American Finance Association, vol. 61(1), pages 379-397, 02.
- John R. Graham & Si Li & Jiaping Qiu, 2011. "Managerial Attributes and Executive Compensation," NBER Working Papers 17368, National Bureau of Economic Research, Inc.
- Jovanovic, Boyan & Prat, Julien, 0.
"Dynamic contracts when agent's quality is unknown,"
- Jovanovic, Boyan & Prat, Julien, 2010. "Dynamic Incentive Contracts under Parameter Uncertainty," CEPR Discussion Papers 8136, C.E.P.R. Discussion Papers.
- Julien Prat & Boyan Jovanovic, 2010. "Dynamic Incentive Contracts Under Parameter Uncertainty," NBER Working Papers 16649, National Bureau of Economic Research, Inc.
- Julien Prat, 2011. "Dynamic Incentive Contracts Under Parameter Uncertainty," 2011 Meeting Papers 249, Society for Economic Dynamics.
- Zabojnik, Jan, 1996. "Pay-performance sensitivity and production uncertainty," Economics Letters, Elsevier, vol. 53(3), pages 291-296, December.
- Xavier Gabaix & Augustin Landier, 2006.
"Why Has CEO Pay Increased So Much?,"
NBER Working Papers
12365, National Bureau of Economic Research, Inc.
- Alex Edmans & Xavier Gabaix, 2009.
"Tractability in Incentive Contracting,"
NBER Working Papers
15545, National Bureau of Economic Research, Inc.
- Edmans, Alex & Gabaix, Xavier, 2010. "Tractability in Incentive Contracting," Working Papers 10-13, University of Pennsylvania, Wharton School, Weiss Center.
- Xavier Gabaix & Alex Edmans, 2010. "Tractability in Incentive Contracting," 2010 Meeting Papers 1120, Society for Economic Dynamics.
- Edmans, Alex & Gabaix, Xavier, 2009. "Tractability in Incentive Contracting," CEPR Discussion Papers 7578, C.E.P.R. Discussion Papers.
- Martijn Cremers & Hongjun Yan, 2009. "Uncertainty and Valuations," Yale School of Management Working Papers amz2383, Yale School of Management, revised 01 May 2009.
- Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
- Ingolf Dittmann & Ernst Maug, 2007. "Lower Salaries and No Options? On the Optimal Structure of Executive Pay," Journal of Finance, American Finance Association, vol. 62(1), pages 303-343, 02.
- Alex Edmans & Xavier Gabaix, 2011. "The Effect of Risk on the CEO Market," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2822-2863.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.