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Dynamic contract and discretionary termination policy under loss aversion

Keiichi Hori () and Hiroshi Osano

Journal of Economic Dynamics and Control, 2020, vol. 111, issue C

Abstract: We explore how the timings of compensation payments and contract terminations are jointly determined in a continuous-time principal–agent model under the discretionary termination policy of investors (the principal) when the manager (agent) has loss–averse preferences. Our theoretical findings provide several new empirical implications for backloaded compensation and forced managerial turnover. Our model also shows that mandatory deferral regulation governing incentive pay induces investors to terminate the contract relation earlier and results in the more frequent replacement of managers.

Keywords: Continuous-time agency; Executive compensation; Reference-dependent utility; Managerial turnover; Mandatory deferral of incentive pay; Stochastic replacement (search for similar items in EconPapers)
JEL-codes: D82 D86 D92 G02 G34 M12 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:111:y:2020:i:c:s0165188919301915

DOI: 10.1016/j.jedc.2019.103794

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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