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Motivating entrepreneurial activity in a firm

  • Bernardo, Antonio E.
  • Cai, Hongbin B
  • Luo, Jiang

We consider the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report her private information truthfully. The optimal policy is to underinvest (compared to first-best) and provide weak incentive pay in low-quality projects and overinvest (compared to first-best) and provide strong incentive pay in high-quality projects. We also show that, unlike the standard agency model, uncertainty and incentives can be positively related.

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt9x19j2jf.

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Date of creation: 28 Jul 2005
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Handle: RePEc:cdl:anderf:qt9x19j2jf
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  6. Rebecca Henderson, 1993. "Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 248-270, Summer.
  7. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  8. Szalay, Dezsö, 2001. "Procurement with an Endogenous Type Distribution," Sonderforschungsbereich 504 Publications 01-49, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  9. Harris, Milton & Raviv, Artur, 1996. " The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-74, September.
  10. Rick Antle & Gary D. Eppen, 1985. "Capital Rationing and Organizational Slack in Capital Budgeting," Management Science, INFORMS, vol. 31(2), pages 163-174, February.
  11. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
  12. Elazar Berkovitch, 2004. "Why the NPV Criterion does not Maximize NPV," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 239-255.
  13. Bernardo, Antonio E. & Cai, Hongbin & Luo, Jiang, 2001. "Capital budgeting and compensation with asymmetric information and moral hazard," Journal of Financial Economics, Elsevier, vol. 61(3), pages 311-344, September.
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