Motivating Entrepreneurial Activity in a Firm

Antonio E. Bernardo, Hongbin Cai and Jiang Luo

The Review of Financial Studies, 2009, vol. 22, issue 3, 1089-1118

Abstract: We examine the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report private information truthfully. The optimal policy is to underinvest (compared to first-best) and provide weak incentive pay in low-quality projects and overinvest (compared to first-best) and provide strong incentive pay in high-quality projects.

Date: 2009
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