Optimal Compensation Contracts for Optimistic Managers

Giovanni Immordino, Anna Maria Menichini and Maria Romano

No 3_224, Working Papers from Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Salerno

Abstract: We study an employment contract between an (endogenously) optimistic manager and realistic investors. The manager faces a trade-off between ensuring that effort reflects accurate news and savoring emotionally beneficial good news. Investors and manager agree on optimal recollection when the weight the manager attaches to anticipatory utility is small. For intermediate values investors bear an extra-cost to make the manager recall bad news. For large weights investors renounce inducing signal recollection. We extend the analysis to the case in which anticipatory utility is the manager’s private information and derive testable predictions on the relationship between personality traits, managerial compensation and recruitment policies

Keywords: Over-optimism; managerial compensation; anticipatory utility (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2012-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Working Papers, november 2012, pages 1-29

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