 Myopic AgencyThe Review of Economic Studies, 2018, vol. 85, issue 2, 1352-1388 Abstract: I consider a dynamic principal-agent setting in which the agent repeatedly chooses between hidden long-term and short-term actions. Relative to the long-term action, the short-term action boosts output today but hurts output tomorrow. I explicitly characterize the optimal contract that always induces the long-term action. It features a cliff-like arrangement that rewards high output today based on the streak of consecutive high outputs the agent has generated leading up to today: The longer the streak, the larger the reward. The optimal contract can be implemented as a bonus bank. Bonus banks feature prominently in the recent debate on bonus reform. I shed light on the opposing arguments driving this debate by formally comparing the myopic agency optimal contract and optimal contracts that arise from traditional effort-shirking agency models. Keywords: Principal-agent; Dynamic contract; Myopia; Robust contract; Investment; Bonus deferral; Bonus bank; Long-term; Short-term; Persistent moral hazard (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:2:p:1352-1388. Access Statistics for this article The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman More articles in The Review of Economic Studies from Review of Economic Studies Ltd |
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