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Incentive Contracts and Downside Risk Sharing

Author

Listed:
  • Bernard Sinclair-Desgagné

    (SKEMA Business School - SKEMA Business School)

  • Sandrine Spaeter

    (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper seeks to characterize incentive compensation in a principal-agent moral hazard setting in which the principal is prudent, or downside risk averse, as many situations (such as that of a patient in hospital or a regulator dealing with food safety) suggest she should be. We show that optimal incentive pay should then be ëapproximately concaveíin performance, the approximation being closer the more downside risk averse the principal is compared to the agent. Limiting the agentís liability would improve the approximation, but taxing the principal would make it coarser. The notion of an approximately concave function we introduce here to describe the pay-performance relationship is relatively recent in mathematics; it is intuitive and translates into concrete empirical implications, notably for the composition of incentive pay. We also clarify which measure of prudence - among the various ones proposed in the literature - is relevant to investigate the tradeo§ between downside risk sharing and incentives.

Suggested Citation

  • Bernard Sinclair-Desgagné & Sandrine Spaeter, 2018. "Incentive Contracts and Downside Risk Sharing," Post-Print halshs-02292797, HAL.
    • Handle: RePEc:hal:journl:halshs-02292797
    DOI: 10.1093/jleo/ewx014
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    Cited by:

    1. Gabriele Cardullo & Luca Beltrametti, 2025. "Monitoring and prudence," Journal of Economics, Springer, vol. 146(2), pages 221-235, October.
    2. Sinclair-Desgagné, Bernard, 2021. "Green human resource management – A personnel economics perspective," Resource and Energy Economics, Elsevier, vol. 66(C).

    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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