Deferred compensation and risk-taking incentives

Roman Inderst, Marcus Opp and Florian Hoffmann
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Florian Hoffmann: University of Bonn

No 674, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Our paper develops a simple principal-agent framework to analyze the equilibrium relationship between risk-taking and the timing of pay. In our setup, the agent's one-time action has persistent effects through affecting the arrival time distribution of a disaster event. While the principal receives informative signals about the agent's action over time, it is costly to rely on this information for incentive pay since the agent is relatively impatient. Optimal compensation contracts resolve the tension between impatience and information with at most two payout dates. Our framework lends itself to analyze recent regulatory interventions mandating minimum deferral periods and clawback provisions in the financial sector. It shows how such regulatory interference in the timing dimension causes the principal to adjust other dimensions of the compensation contract, which may then lead to higher risk-taking. Mandatory deferral requirements are more likely to be effective in reducing risk-taking when competition for agents is high.

Date: 2016
New Economics Papers: this item is included in nep-ban, nep-cta, nep-hrm, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:674

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