Optimal dynamic contracts with moral hazard and costly monitoring

• 成果类型: Article
• 署名作者: Piskorski, Tomasz; Westerfield, Mark M.
• 署名单位: Columbia University; University of Washington; University of Washington Seattle; Columbia University; University of Washington; University of Washington Seattle
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2016.08.003
• 发表日期: 2016
• 页码: 242-281
• 关键词: Monitoring; dynamic contracts; Managerial compensation; moral hazard; Endogenous financing constraints

摘要

We introduce a tractable dynamic monitoring technology into a continuous-time moral-hazard problem and study the optimal long-term contract between principal and agent. Monitoring adds value by allowing the principal to reduce the intensity of performance-based incentives, reducing the likelihood of costly termination. We present a novel characterization of optimal dynamic incentive provision when performance based incentives may decline continuously to zero. Termination happens in equilibrium only if its costs are relatively low. In general, the intensity of both monitoring and performance-based compensation can be non-monotonic functions of the quality of past performance. Our results can also help explain puzzling empirical findings on the relationship between performance history and future pay-performance sensitivity and on the linkage between termination, performance, and monitoring. We also discuss implications of our model for optimal security design and endogenous financing constraints. (C) 2016 Elsevier Inc. All rights reserved.