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- Title
USING COST OBSERVATION TO REGULATE A MANAGER WHO HAS A PREFERENCE FOR EMPIRE-BUILDING.
- Authors
BORGES, ANA PINTO; CORREIA-DA-SILVA, JOÃO
- Abstract
We study regulation of a manager who has a preference for empire-building (high output), in the presence of moral hazard (unobservable effort) and adverse selection (unobservable productivity). We find that the optimal contract is linear in cost, being composed by a fixed payment plus a partial cost reimbursement. The preference for higher output reduces the manager's tendency to announce that his or her productivity is low, allowing a more powered incentive scheme (a lower fraction of the cost is reimbursed), which alleviates the problem of moral hazard.
- Subjects
BUSINESS development; MORAL hazard; ADVERSE selection (Insurance); PERSONAL managers; RISK management in business; LABOR incentives; INDUSTRIAL productivity
- Publication
Manchester School (1463-6786), 2011, Vol 79, Issue 1, p29
- ISSN
1463-6786
- Publication type
Article
- DOI
10.1111/j.1467-9957.2010.02224.x