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Incentives, Project Choice and Dynamic Multitasking

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  • Martin Szydlowski

Abstract

I study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project selection which depends on both a project’s NPV as well as its signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, the current firm size and the agent’s continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice depends more on the NPV and less on the signal to noise ratio. The optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection rule resembles a hurdle rate criterion.

Suggested Citation

  • Martin Szydlowski, 2012. "Incentives, Project Choice and Dynamic Multitasking," Discussion Papers 1525, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1525
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    References listed on IDEAS

    as
    1. Hui Ou-Yang, 2003. "Optimal Contracts in a Continuous-Time Delegated Portfolio Management Problem," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 173-208.
    2. Josepa Miquel-Florensa, 2007. "Optimal Incentives in Dynamic Multiple Project Contracts," Working Papers 2007_2, York University, Department of Economics.
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    More about this item

    Keywords

    Continuous-time contracting; Project Choice; Multitasking; Bonus Payments; CEO Compensation JEL Classification Numbers:D86; G11; G31; G32; M12; M52;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • 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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