This paper analyzes optimal non-linear portfolio management contracts. We consider a setting where the investor faces moral hazard with respect to the effort and risk choices of the portfolio manager. The manager’s employment contract promises her: (a) a fixed payment, (b) a proportional asset-based fee, (c) a benchmark-linked fulcrum fee, and (d) a benchmark-linked option-type “bonus” incentiv...

Optimal incentive mechanisms may require that agents be rewarded differentially even when they are completely identical and induced to act the same. We demonstrate this point using a simple incentive model where agents’ decisions about effort exertion are mapped into a probability that the project will succeed. We show that full discrimination across all agents is required if and only if the te...

We present a theory of the dynamics of a firm’s investment in the presence of imperfect capital markets and optimal long-term contracts. The class of imperfections that we consider involves the incentive problems that accompany external financing. The analysis is sufficiently general to encompass a range of such incentive problems. We derive a number of results regarding firms’ investment decis...

Inßation targeting regimes deÞne a performance measure for the central bank. A regime that places a large (small) weight on achieivng the target is analogous to a high (low) power incentive scheme. High powered incentive structures promote accountability but may distort stabilization policy. The optimal power under inßation targeting is derived under perfect and imperfect information. The funda...

This paper studies an online retail supply chain that includes one referral infomediary and one retailer, in which the infomediary provides demand referral service to retailers and incentive rebates to customers. A linear dual-channel demand with the effect of customer incentive and horizontal service cooperation model was established, and then the optimal policies of infomediary and retailers ...

This paper analyzes optimal incentive compatible debt contracts when lenders are risk averse. The decisive factor in this regard is that risk aversion requires to consider further sources of risk the lenders are exposed to. The main results derived in a setting of asymmetric information – the payment obligation of the optimal incentive compatible contract increases due to risk aversion of lende...

In an international payment system where there are two regulators what form should the optimal policy of the central banks take? In this paper I show that two central banks operating in a non-cooperative way will not have an incentive to achieve the optimal allocation of goods. I further show that this non-cooperative outcome will be supported by a zero intraday interest rate and constant fixed...

How should a capacity-constrained firm design an incentive-compatible price-scheduling mechanism to maximize revenues from a heterogeneous pool of time-sensitive customers with private information on their willingness to pay, time-sensitivity and processing requirement? We consider this question in the context of a queueing system that serves two customer types. We provide the following insight...

We consider continuous-time models in which the agent is paid at the end of the time horizon by the principal, who does not know the agent’s type. The agent dynamically affects either the drift of the underlying output process, or its volatility. The principal’s problem reduces to a calculus of variation problem for the agent’s level of utility. The optimal ratio of marginal utilities is random...

Substantial evidence indicates that incentive value depends on an anticipation of rewards within a given context. However, the computations underlying this context sensitivity remain unknown. To address this question, we introduce a normative (Bayesian) account of how rewards map to incentive values. This assumes that the brain inverts a model of how rewards are generated. Key features of our a...