IDEAS home Printed from https://ideas.repec.org/a/taf/tjorxx/v72y2021i1p109-129.html
   My bibliography  Save this article

Impact of outside option on managerial compensation contract and environmental strategies in polluting industries

Author

Listed:
  • Guoqing Yang
  • Wansheng Tang
  • Ruiqing Zhao

Abstract

To unveil how a manager’s outside option affects managerial compensation contracts and environmental strategies in polluting industries, this article studies an agency problem in which a risk-averse manager has private information about his ability and type-dependent outside option. A compensation contract is designed to incentivise the manager to truthfully report. Meanwhile, the firm makes an optimal choice between end-of-pipe strategy and pollution prevention strategy to maximise its profit. Based on the principal-agent theory, we establish a managerial compensation contract model and derive the optimal contract mechanism by solving its equivalent optimal control problem. The results indicate that without an outside option, the manager receives a constant bonus share rate and no information rent under the end-of-pipe strategy, whereas he obtains a downward distorted incentive and high information rent under the pollution prevention strategy. Considering outside options, the manager may receive information rent under the end-of-pipe strategy while receiving a pooling distorted incentive under the pollution prevention strategy. In a certain circumstance, the managers are pooled with the same bonus share rate and information rent. However, due to the interaction between the countervailing incentives, it is difficult to identify the change in total information rent and the pollution prevention strategy decision.

Suggested Citation

  • Guoqing Yang & Wansheng Tang & Ruiqing Zhao, 2021. "Impact of outside option on managerial compensation contract and environmental strategies in polluting industries," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 72(1), pages 109-129, January.
  • Handle: RePEc:taf:tjorxx:v:72:y:2021:i:1:p:109-129
    DOI: 10.1080/01605682.2019.1641648
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/01605682.2019.1641648
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/01605682.2019.1641648?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

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

    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:taf:tjorxx:v:72:y:2021:i:1:p:109-129. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/tjor .

    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.