Optimal Information Design and Incentive Contracts with Performance Measure Manipulation

Optimal Incentive Contracts and Information Cascades

We examine information aggregation regarding industry capital productivity from privately informed managers in a dynamic model with optimal incentive contracts. Information cascades always occur if managers enjoy limited liability: when beliefs regarding productivity become endogenously extreme (optimistic or pessimistic), learning stops. There is no learning if initial beliefs are extreme, or ...

Subjective Performance Measures in Optimal Incentive Contracts*

Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. We show that the presence of sufficiently effective explicit contracts can render all implicit contracts inf...

”Yes Men,” Integrity, and the Optimal Design of Incentive Contracts

In a pioneering approach towards the explanation of the phenomenon of “yes man” behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we...

Incentive Contracts and Performance Measurement

Optimal Incentive Contracts for Experts

This paper analyzes optimal incentive contracts for information acquisition and revelation. A decision maker faces the problem to design a contract that provides an expert with incentives to acquire and reveal information. We show that it is in general not optimal to reward the expert if his recommendation is confirmed. The common observation that experts are paid when their recommendation is c...