Incentives, Project Choice and Dynamic Multitasking
AbstractI study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project’s NPV as well as its signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, the current firm size and the agent’s continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice depends more on the NPV and less on the signal to noise ratio. The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection rule resembles a hurdle rate criterion.
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Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1525.
Date of creation: 02 Oct 2012
Date of revision:
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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
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Find related papers by JEL classification:
- CEO - Mathematical and Quantitative Methods - - - - -
- Com - Mathematical and Quantitative Methods - - - - -
- JEL - Labor and Demographic Economics - - - - -
- Cla - Mathematical and Quantitative Methods - - - - -
- Num - Economic History - - - - -
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
- NEP-CTA-2011-04-30 (Contract Theory & Applications)
- NEP-HRM-2011-04-30 (Human Capital & Human Resource Management)
- NEP-PPM-2011-04-30 (Project, Program & Portfolio 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.:
- Josepa Miquel-Florensa, 2007. "Optimal Incentives in Dynamic Multiple Project Contracts," Working Papers 2007_2, York University, Department of Economics.
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