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Information Externalities, Share-Price Based Incentives and Managerial Behaviour

We survey recent theoretical research on the effects of short-term share-price based marginal incentive schemes. Such schemes can induce inefficient managerial behaviour in both hidden action and hidden type contexts. These problems arise from informational asymmetries: managers take actions to manipulate the information flow rather than to maximize firm value. More generally, imperfect transmission of information between managers and shareholders or between managers of different firms can lead to similar distortions even when the parties' interests are aligned.

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File URL: http://cowles.yale.edu/sites/default/files/files/pub/d11/d1107.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1107.

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Length: 26 pages
Date of creation: Jul 1995
Date of revision:
Publication status: Published in Journal of Economic Surveys (1996), 10: 1-21
Handle: RePEc:cwl:cwldpp:1107
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Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Web page: http://cowles.yale.edu/

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