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Compensation Convexity without Utility Restriction

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  • Jiong Gong
  • Ping Jiang
  • Xiaochuan Xing

Abstract

We develop an optimal contract model on the use of stock options for chief executive officer compensation under the Mirrlees–Rogerson moral hazard framework. We find that convexity, as know as, the use of stock options, can arise with a broader range of agent utility functions than allowed by Hemmer et al. (). We characterise the necessary conditions regarding the behaviour of the agent's marginal risk tolerance for both the concavity and convexity cases of the likelihood‐ratio function. We find stock options need to be used more intensively, when the agent displays a higher marginal risk tolerance and when the realised task output is higher.

Suggested Citation

  • Jiong Gong & Ping Jiang & Xiaochuan Xing, 2018. "Compensation Convexity without Utility Restriction," Australian Economic Papers, Wiley Blackwell, vol. 57(3), pages 238-249, September.
  • Handle: RePEc:bla:ausecp:v:57:y:2018:i:3:p:238-249
    DOI: 10.1111/1467-8454.12129
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