Early Versus Late Effort in Dynamic Agencies with Unverifiable Information
J. Schöndube. BuR - Business Research, 1 (2):
165-186(December 2008)
Abstract
In this paper we analyze a dynamic agency problem where contracting parties do not know the agent's future productivity at the beginning of the relationship. We consider a two-period model where both the agent and the principal observe the agent's second-period productivity at the end of the first period. This observation is assumed to be non-verifiable information. We compare long-term contracts with short-term contracts with respect to their suitability to motivate effort in both periods. On the one hand, short-term contracts allow for a better fine-tuning of second-period incentives as they can be aligned with the agent's second-period productivity. On the other hand, in short-term contracts first-period effort incentives might be distorted as contracts have to be sequentially optimal. Hence, the difference between long-term and short-term contracts is characterized by a trade-off between inducing effort in the first and in the second period. We analyze the determinants of this trade-off and demonstrate its implications for performance measurement and information system design.
%0 Journal Article
%1 Schoen08
%A Schöndube, Jens Robert
%D 2008
%J BuR - Business Research
%K accounting business-research dynamic-agency-problem
%N 2
%P 165-186
%T Early Versus Late Effort in Dynamic Agencies with Unverifiable Information
%U http://www.business-research.org/2008/2/accounting/1651/schoendube.pdf
%V 1
%X In this paper we analyze a dynamic agency problem where contracting parties do not know the agent's future productivity at the beginning of the relationship. We consider a two-period model where both the agent and the principal observe the agent's second-period productivity at the end of the first period. This observation is assumed to be non-verifiable information. We compare long-term contracts with short-term contracts with respect to their suitability to motivate effort in both periods. On the one hand, short-term contracts allow for a better fine-tuning of second-period incentives as they can be aligned with the agent's second-period productivity. On the other hand, in short-term contracts first-period effort incentives might be distorted as contracts have to be sequentially optimal. Hence, the difference between long-term and short-term contracts is characterized by a trade-off between inducing effort in the first and in the second period. We analyze the determinants of this trade-off and demonstrate its implications for performance measurement and information system design.
@article{[Schoen08],
abstract = {In this paper we analyze a dynamic agency problem where contracting parties do not know the agent's future productivity at the beginning of the relationship. We consider a two-period model where both the agent and the principal observe the agent's second-period productivity at the end of the first period. This observation is assumed to be non-verifiable information. We compare long-term contracts with short-term contracts with respect to their suitability to motivate effort in both periods. On the one hand, short-term contracts allow for a better fine-tuning of second-period incentives as they can be aligned with the agent's second-period productivity. On the other hand, in short-term contracts first-period effort incentives might be distorted as contracts have to be sequentially optimal. Hence, the difference between long-term and short-term contracts is characterized by a trade-off between inducing effort in the first and in the second period. We analyze the determinants of this trade-off and demonstrate its implications for performance measurement and information system design.
},
added-at = {2008-12-18T09:35:25.000+0100},
author = {Schöndube, Jens Robert},
biburl = {https://www.bibsonomy.org/bibtex/2846a1cea7d7448a9f81083cdc2be34f5/usbk},
interhash = {8be801ec186fbb093a0ca75ecd612ba3},
intrahash = {846a1cea7d7448a9f81083cdc2be34f5},
journal = {BuR - Business Research },
keywords = {accounting business-research dynamic-agency-problem},
month = {December},
number = 2,
pages = {165-186},
timestamp = {2008-12-18T10:19:41.000+0100},
title = {Early Versus Late Effort in Dynamic Agencies with Unverifiable Information},
url = {http://www.business-research.org/2008/2/accounting/1651/schoendube.pdf},
volume = 1,
year = 2008
}