Managerial short-termism, turnover policy, and the dynamics of incentives

Published

Journal Article

© The Author 2017. I study managerial short-termism in a dynamic model of project development with hidden effort and imperfect observability of quality. The manager can complete the project faster by reducing quality. To preempt this behavior, the principal makes payments contingent on long-term outcomes. I analyze the dynamics of the optimal contract and its implications for the level of managerial turnover. I show that optimal contracts might be stationary and entail no termination. In general, I show that the principal reduces the manager's temptation to behave myopically by reducing the likelihood of termination and deferring compensation. The model predicts a negative relation between the rate of managerial turnover and the use of deferred compensation that is consistent with evidence of managerial compensation contracts. (JEL C73, D86, G39, J33, M52)

Full Text

Duke Authors

Cited Authors

  • Varas, F

Published Date

  • January 1, 2018

Published In

Volume / Issue

  • 31 / 9

Start / End Page

  • 3409 - 3451

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhx088

Citation Source

  • Scopus