Skip to main content
Article
Using cost observation to regulate a manager who has a preference for empire-building
The Manchester School (2011)
  • Ana Pinto Borges
  • Joao Correia-da-Silva, Universidade do Porto
Abstract
We 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.
Disciplines
Publication Date
2011
Citation Information
Ana 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/