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On the Value of Improved Informativeness

  • Pierre Chaigneau
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    One of the main predictions of principal-agent theory, the “informativeness principle”, is often violated in practice. We propose an explanation that emphasizes the role played by the change in the form of the optimal contract that follows an improvement in informativeness. We show that the overall gains from a less noisy performance measure emanate from two sources: the direct effect of a change in the volatility of the performance measure, and the effect of the induced change on the form of the optimal compensation contract. We emphasize that the direct effect can either largely under-estimate or largely overtimate the overall gains from improved informativeness, and we show that these gains can even be nil in some instances.

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-05.pdf
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    Paper provided by CIRPEE in its series Cahiers de recherche with number 1205.

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    Date of creation: 2012
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    Handle: RePEc:lvl:lacicr:1205
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    9. Maug, Ernst & Dittmann, Ingolf, 2007. "Lower Salaries and No Options: The Optimal Structure of Executive Pay," Sonderforschungsbereich 504 Publications 07-41, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    12. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, June.
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    17. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
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