IDEAS home Printed from https://ideas.repec.org/a/ecm/emetrp/v55y1987i2p303-28.html
   My bibliography  Save this article

Aggregation and Linearity in the Provision of Intertemporal Incentives

Author

Listed:
  • Holmstrom, Bengt
  • Milgrom, Paul

Abstract

The authors develop two themes in the theory of incentive schemes. First, one need not always use all of the information available in an optimal incentive contract. Accounting information, which aggregates performance over time, is sufficient for optimal compensation schemes in certain classes of environments. Second, optimal rules in a rich environment must work well in a range of circumstances and cannot, therefore, be complicated functions of the observed outcome. The authors illustrate these ideas in a particular model where the agent has a rich space of controls, showing that the unique optimal compensation scheme is a linear function of profits. Copyright 1987 by The Econometric Society.

Suggested Citation

  • Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    • Handle: RePEc:ecm:emetrp:v:55:y:1987:i:2:p:303-28
    as

    Download full text from publisher

    File URL: http://links.jstor.org/sici?sici=0012-9682%28198703%2955%3A2%3C303%3AAALITP%3E2.0.CO%3B2-K&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    2. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    3. Paul R. Milgrom & Robert J. Weber, 1985. "Distributional Strategies for Games with Incomplete Information," Mathematics of Operations Research, INFORMS, vol. 10(4), pages 619-632, November.
    4. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chifeng Dai, 2022. "Optimal risk sharing with ex post private information: Rules versus discretion," Southern Economic Journal, John Wiley & Sons, vol. 89(1), pages 160-184, July.
    2. Mirman, Leonard J. & Santugini, Marc, 2013. "Firms, shareholders, and financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 152-164.
    3. Benjamin E. Hermalin & Michael L. Katz, 1994. "Corporate Diversification and Agency," Industrial Organization 9402001, University Library of Munich, Germany, revised 15 Nov 1996.
    4. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2018. "Does improved information improve incentives?," Journal of Financial Economics, Elsevier, vol. 130(2), pages 291-307.
    5. Hilmer, Michael, 2013. "Fiscal treatment of managerial compensation - a welfare analysis," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79703, Verein für Socialpolitik / German Economic Association.
    6. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2000. "A Theory of Supervision with Endogenous Transaction Costs," Annals of Economics and Finance, Society for AEF, vol. 1(2), pages 231-263, November.
    7. Florian Hoffmann & Roman Inderst & Marcus Opp, 2021. "Only Time Will Tell: A Theory of Deferred Compensation [Motivating Innovation in Newly Public Firms]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(3), pages 1253-1278.
    8. RafaelDi Tella & Federico Weinschelbaum, 2008. "Choosing agents and monitoring consumption: a note on wealth as a corruption-controlling device," Economic Journal, Royal Economic Society, vol. 118(532), pages 1552-1571, October.
    9. Damien S Eldridge, 2007. "A Shirking Theory of Referrals," Working Papers 2007.05, School of Economics, La Trobe University.
    10. Anna-Maria Isabel Maurer, 2025. "The Disconnect between Syndicated Lending Activities and ESG Determinants in Banks’ Executive Compensation," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 15(3), pages 1-2.
    11. Pierre Chaigneau, 2012. "On the Value of Improved Informativeness," Cahiers de recherche 1205, CIRPEE.
    12. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    13. Florian Hoffmann & Roman Inderst & Marcus Opp, 2022. "The Economics of Deferral and Clawback Requirements," Journal of Finance, American Finance Association, vol. 77(4), pages 2423-2470, August.
    14. Dirk Yandell, 1988. "Audit Information and Incentives for Efficiency," The American Economist, Sage Publications, vol. 32(1), pages 49-58, March.
    15. Rainer Niemann, 2011. "Asymmetric Taxation and Performance-Based Incentive Contracts," CESifo Working Paper Series 3363, CESifo.
    16. Daniel N. Deli, 2002. "Mutual Fund Advisory Contracts: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 57(1), pages 109-133, February.
    17. Mariano Tommasi & Federico Weinschelbaum, 2007. "Principal-Agent Contracts under the Threat of Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(3), pages 379-393, September.
    18. repec:awi:wpaper:0452 is not listed on IDEAS
    19. Edmans, Alex & Gottlieb, Daniel & Chaigneau, Pierre, 2014. "The Informativeness Principle Under Limited Liability," CEPR Discussion Papers 10143, C.E.P.R. Discussion Papers.
    20. Schnedler, Wendelin, 2007. "You Don't Always Get What You Pay For," IZA Discussion Papers 3077, Institute of Labor Economics (IZA).
    21. John M. Barron & Kathy Paulson Gjerde, 1996. "Who Adopts Total Quality Management (TQM): Theory and An Empirical Test," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(1), pages 69-106, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:emetrp:v:55:y:1987:i:2:p:303-28. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.