Using cost observation to regulate a manager who has a preference for empire-buildingThe Manchester School (2011)
AbstractWe study regulation of a manager who has a preference for empire-building (high output), in the presence of moral hazard (unobservable effort) and adverse selection unobservable productivity). We find that the optimal contract is linear in cost, being composed by a fixed payment plus a partial cost-reimbursement. The preference for higher output reduces the manager's tendency to announce that her productivity is low, allowing a more powered incentive scheme (a lower fraction of the cost is reimbursed), which alleviates the problem of moral hazard.
Citation InformationAna Pinto Borges and Joao Correia-da-Silva. "Using cost observation to regulate a manager who has a preference for empire-building" The Manchester School Vol. 79 Iss. 1 (2011)
Available at: http://works.bepress.com/joao/6/