Incentives, Project Choice and Dynamic Multitasking

Martin Szydlowski

No 1525, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: 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 selection which depends on both a project’s NPV as well as its signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, the 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 depends 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.

Keywords: Continuous-time contracting; Project Choice; Multitasking; Bonus Payments; CEO Compensation JEL Classification Numbers:D86; G11; G31; G32; M12; M52 (search for similar items in EconPapers)
Date: 2012-10-02
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-ppm
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Incentives, project choice, and dynamic multitasking (2019)
Working Paper: Incentives, Project Choice, and Dynamic Multitasking (2014)
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