Incentives, project choice and dynamic multitasking

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 1525

Classification and Topics

• 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

Contributors, Places and Time

• 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

Further information

• Handle: http://hdl.handle.net/10419/59641
• Last update: 10.03.2025, 11:45 AM CET