IDEAS home Printed from https://ideas.repec.org/p/red/sed014/314.html
   My bibliography  Save this paper

Optimal Design of Internal Disclosure

Author

Listed:
  • Dmitry Orlov

    (Stanford Graduate School of Business)

Abstract

This paper studies the joint design of optimal incentive pay and information disclosure in a dynamic moral hazard problem. The principal is more informed about the outcomes of agent's actions and actively manages information available to the agent. Sharing information with the agent increases productivity (for example, allowing a better allocation of resources or effort), but increases the cost of providing incentives. The optimal contract features incomplete information sharing with positive information shared more than negative information and past negative information leading to less information sharing in the future.

Suggested Citation

  • Dmitry Orlov, 2014. "Optimal Design of Internal Disclosure," 2014 Meeting Papers 314, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:314
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2014/paper_314.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gustavo Manso, 2011. "Motivating Innovation," Journal of Finance, American Finance Association, vol. 66(5), pages 1823-1860, October.
    2. Viral V. Acharya & Peter DeMarzo & Ilan Kremer, 2011. "Endogenous Information Flows and the Clustering of Announcements," American Economic Review, American Economic Association, vol. 101(7), pages 2955-2979, December.
    3. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 285-315.
    4. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
    5. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    6. Stein, Jeremy C, 1997. "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
    7. George Baker, 2000. "The Use of Performance Measures in Incentive Contracting," American Economic Review, American Economic Association, vol. 90(2), pages 415-420, May.
    8. Zhiguo He, 2012. "Dynamic Compensation Contracts with Private Savings," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1494-1549.
    9. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    10. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    11. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    12. Gian Luca Clementi & Hugo Hopenhayn, "undated". "A Theory of Financing Constraints and Firm Dynamics," GSIA Working Papers 2002-E9, Carnegie Mellon University, Tepper School of Business.
    13. Benjamin E. Hermalin & Michael S. Weisbach, 2012. "Information Disclosure and Corporate Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 195-234, February.
    14. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    15. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
    16. Peter M. DeMarzo & Michael J. Fishman, 2007. "Optimal Long-Term Financial Contracting," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2079-2128, November.
    17. Florian Ederer, 2010. "Feedback and Motivation in Dynamic Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 733-769, September.
    18. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-1733, November.
    19. Alessandro Lizzeri & Margaret A. Meyer & Nicola Persico, 2002. "The Incentive Effects of Interim Performance Evaluations," Penn CARESS Working Papers 592e9328faf6e775bf331e1c0, Penn Economics Department.
    20. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    21. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
    22. Abigail S. Hornstein & Minyuan Zhao, 2011. "Corporate Capital Budgeting Decisions and Information Sharing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1135-1170, December.
    23. Ron Siegel, 2010. "Asymmetric Contests with Conditional Investments," American Economic Review, American Economic Association, vol. 100(5), pages 2230-2260, December.
    24. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    25. Aoyagi, Masaki, 2010. "Information feedback in a dynamic tournament," Games and Economic Behavior, Elsevier, vol. 70(2), pages 242-260, November.
    26. Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 957-984.
    27. PETER M. DeMARZO & YULIY SANNIKOV, 2006. "Optimal Security Design and Dynamic Capital Structure in a Continuous‐Time Agency Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2681-2724, December.
    28. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    29. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    30. repec:oup:restud:v:84:y::i:1:p:182-236. is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Orlov, Dmitry, 2022. "Frequent monitoring in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 206(C).
    2. Ján Zábojník, 2014. "Subjective evaluations with performance feedback," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 341-369, June.
    3. Terstiege, Stefan, 2013. "Objective versus Subjective Performance Evaluations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 430, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
    5. Chen, Bin R., 2015. "Subjective performance feedback, ability attribution, and renegotiation-proof contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 155-174.
    6. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    7. Bin R. Chen & Y. Stephen Chiu, 2013. "Interim Performance Evaluation in Contract Design," Economic Journal, Royal Economic Society, vol. 123, pages 665-698, June.
    8. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo.
    9. Garrett, Daniel F. & Pavan, Alessandro, 2015. "Dynamic managerial compensation: A variational approach," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 775-818.
    10. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    11. Terstiege, Stefan, 2014. "Private versus verifiable interim performance evaluations under uncertainty," Economics Letters, Elsevier, vol. 123(3), pages 341-344.
    12. Zhao, Rui R., 2012. "Renegotiation and conflict resolution in relational contracting," Games and Economic Behavior, Elsevier, vol. 75(2), pages 964-983.
    13. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Sara Martinez-de-Morentin, 2017. "Performance Measurement and Incentive Intensity," Journal of Labor Research, Springer, vol. 38(4), pages 496-546, December.
    14. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.
    15. Helmut Bester & Johannes Münster, 2016. "Subjective evaluation versus public information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(4), pages 723-753, April.
    16. Francesc Dilmé & Daniel F. Garrett, 2023. "Relational Contracts: Public versus Private Savings," Econometrica, Econometric Society, vol. 91(3), pages 1025-1075, May.
    17. Patrick Bolton & Neng Wang & Jinqiang Yang, 2019. "Optimal Contracting, Corporate Finance, and Valuation with Inalienable Human Capital," Journal of Finance, American Finance Association, vol. 74(3), pages 1363-1429, June.
    18. Chang-Koo Chi & Kyoung Jin Choi, 2017. "The impact of firm size on dynamic incentives and investment," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 147-177, March.
    19. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    20. Wuming Fu & Qian Qi, 2023. "Artificial Intelligence and Dual Contract," Papers 2303.12350, arXiv.org.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed014:314. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.