Arbeitspapier

Incentives, project choice and dynamic multitasking

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 execution which depends on both a project's NPV as well as it's signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, 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 will depend 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.

Language
Englisch

Bibliographic citation
Series: Discussion Paper ; No. 1525

Classification
Wirtschaft
Economics of Contract: Theory
Portfolio Choice; Investment Decisions
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Personnel Management; Executives; Executive Compensation
Personnel Economics: Compensation and Compensation Methods and Their Effects
Subject
Continuous-time contracting
Project Choice
Multitasking
Bonus Payments
CEO Compensation

Event
Geistige Schöpfung
(who)
Szydlowski, Martin
Event
Veröffentlichung
(who)
Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science
(where)
Evanston, IL
(when)
2011

Handle
Last update
10.03.2025, 11:45 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Szydlowski, Martin
  • Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science

Time of origin

  • 2011

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