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But Is It Myopia? Risk Aversion and the Efficiency of Stock‐Based Managerial Incentives

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  • Jonathan Carmel

Abstract

This paper points out that stock incentives do not lead to myopia unless they result in more emphasis on the short‐term than would occur under an optimal contract. It shows that myopia findings relative to the standard used throughout the literature (first‐best efficiency) are often reversed when evaluated relative to the relevant standard of optimal contracting. Results reported by the previous literature to be myopia often in fact have excessive emphasis on the long‐term. The paper solves in closed‐form for the region in parameter space which gives rise to these reversals and shows that it can be arbitrarily large.

Suggested Citation

  • Jonathan Carmel, 2008. "But Is It Myopia? Risk Aversion and the Efficiency of Stock‐Based Managerial Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(2), pages 541-579, June.
    • Handle: RePEc:bla:jemstr:v:17:y:2008:i:2:p:541-579
    DOI: 10.1111/j.1530-9134.2008.00186.x
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    References listed on IDEAS

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    4. Josh Lerner & Julie Wulf, 2007. "Innovation and Incentives: Evidence from Corporate R&D," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 634-644, November.
    5. Adam Brandenburger & Ben Polak, 1996. "When Managers Cover Their Posteriors: Making the Decisions the Market Wants to See," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 523-541, Autumn.
    6. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
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