Impact of outside option on managerial compensation contract and environmental strategies in polluting industries

Guoqing Yang, Wansheng Tang and Ruiqing Zhao

Journal of the Operational Research Society, 2021, vol. 72, issue 1, 109-129

Abstract: To unveil how a manager’s outside option affects managerial compensation contracts and environmental strategies in polluting industries, this article studies an agency problem in which a risk-averse manager has private information about his ability and type-dependent outside option. A compensation contract is designed to incentivise the manager to truthfully report. Meanwhile, the firm makes an optimal choice between end-of-pipe strategy and pollution prevention strategy to maximise its profit. Based on the principal-agent theory, we establish a managerial compensation contract model and derive the optimal contract mechanism by solving its equivalent optimal control problem. The results indicate that without an outside option, the manager receives a constant bonus share rate and no information rent under the end-of-pipe strategy, whereas he obtains a downward distorted incentive and high information rent under the pollution prevention strategy. Considering outside options, the manager may receive information rent under the end-of-pipe strategy while receiving a pooling distorted incentive under the pollution prevention strategy. In a certain circumstance, the managers are pooled with the same bonus share rate and information rent. However, due to the interaction between the countervailing incentives, it is difficult to identify the change in total information rent and the pollution prevention strategy decision.

Date: 2021
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/01605682.2019.1641648 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:tjorxx:v:72:y:2021:i:1:p:109-129

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/tjor20

DOI: 10.1080/01605682.2019.1641648

Access Statistics for this article

Journal of the Operational Research Society is currently edited by Tom Archibald

More articles in Journal of the Operational Research Society from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().