Optimal incentives for managerial innovation

Gino Loyola and Yolanda Portilla

The North American Journal of Economics and Finance, 2023, vol. 68, issue C

Abstract: An agency model is proposed that identifies the optimal executive compensation scheme for a business where the owner’s delegation of investment decision-making to the manager gives rise to a two-dimensional moral hazard problem relating to the levels of managerial effort and innovation, respectively. The optimal executive compensation structure is shown to depend on which of the two moral hazard dimensions predominates, thus accounting for the coexistence in the real-world of bonus-like plans with different convexity degrees and risk-reward schemes. The model also identifies the conditions under which the efficient investment policy involves high innovation, highlighting the role played by the delegation of investment decisions in the coexistence of high-tech and more traditional industries.

Keywords: Corporate governance; Agency problem; Innovation; Executive compensation; Investment policy (search for similar items in EconPapers)
JEL-codes: D86 G11 G34 M12 O31 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823001055

DOI: 10.1016/j.najef.2023.101982

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