Optimal Dynamic Contract with a Shock on the Benefit of Cash Flow Diversion

Vincent Tena
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Vincent Tena: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper explores a continuous-time principal-agent model where the agent can divert cash flow.The novelty is that the benefit of cash-flow diversion is subject to an exogenous and persistentshock that can be interpreted as a new regulation on the executive pay that limits the usage offringe benefits or perquisites out of the owner?s sight. First, our results suggest that the bonusesare compressed following the shock: the expected future bonuses of a good performer increasewhile those of a poor performer decrease. Second, our analysis also predicts theregulation-induced retention of a poor performer, defined as maintaining an agent in place whilehis poor performance would have induced his dismissal in the absence of the shock on the benefitof cash-flow diversion.

Date: 2022-07
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Published in 2022 World Finance Conference, Jul 2022, Turin, Italy

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04398205

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